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Geopolitics Influence on the Forex Market
Written by: PaxForex analytics dept - Thursday, 29 May 2014 0 comments
The concept of geopolitics is resulted from the combination of geography with the science of politics. Geopolitics is the same as politics which have been viewed from a geographical point of view. Geopolitics is more discussed in the issues related to foreign policy and reveals the importance of its political geographical aspect in the form of decisions on foreign policy. The geopolitical importance of countries is relative and directly results from its internal situation and conditions which become significant in its foreign policy.
The currency of every country can potentially be converted to a universal and exchangeable foreign currency in international markets; this however happens only when such a currency is demanded from other countries. The increase of currency demand in global foreign currency exchange markets results in the discussion of currency geopolitics. It means that a country which is successful in providing its economic and political security will also be able to employ its currency as a globally valid currency.
Some global geopolitical events have a considerable influence on the forex market. Wars, political scandals, elections, peace treaties, nuclear bomb tests and terrorist attacks usually result in a lot of
consequences and expectations regarding those consequences. Currency rates respond to such events with the fluctuations that end up in termination of the old trends and setting up of the new long-term trends. That’s why it’s important for the currency traders to monitor all the related news and make the market decisions in relation to them.
The history of forex market is littered with examples of political trades. The key to understanding speculative behavior with respect to any geopolitical unrest is that speculators run first and ask questions later. In other words, whenever investors fear any threat to their capital they will quickly retreat to the sidelines until they are certain that the political risk has disappeared. Therefore the general rule of thumb in the currency market is that politics almost always trumps economics.
With the importance of the economic factor as the main factor of power and bargaining at a global level, the concept of geopolitics depends mainly on the economy. The existence of suitable economic factors such as high per capita income and output, huge markets, extensive, various and strategic productions, the desired economic growth, the security of investing and predictability can be named as features strengthening the geopolitical situations of countries.