Unit 2 · Level 2 · Currencies & FX
Why money moves
Foreign exchange turns over roughly $7.5 trillion a DAY, more than global stock markets combined. A currency's price is just what one economy's money is worth in another's, and three forces move it: interest rates (where does cash earn more?), trade (who needs whose currency to buy things?), and confidence (where does money feel safe?).
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What you get asked
A central bank hikes rates faster than its peers. Its currency usually:
Global cash chases yield. If euros suddenly earn more than yen, investors buy euros to capture the difference, and that buying itself pushes the euro up.
Match each force to how it moves a currency
Day to day, rates and confidence dominate. Over decades, inflation differences quietly decide which currencies hold their value and which melt.
In 2022 the euro fell to ___ with the US dollar for the first time in 20 years, as the Fed hiked faster than the ECB.
One euro bought just one dollar. The rate gap did most of the damage: US cash suddenly paid meaningfully more than euro cash, and money voted with its feet.
Turkey's lira lost most of its value between 2018 and 2023 mainly because:
Rates were held far below inflation, so holding lira meant guaranteed loss of buying power. Locals and foreigners alike swapped into dollars and euros. Confidence, once gone, is brutally expensive to win back.
Over many YEARS, which force most anchors where a currency trades?
Short-term moves are noise; long-term, currencies of high-inflation countries fall against currencies of low-inflation ones. Same compounding maths as everywhere else in finance, just running in reverse. 🐜
The rest of this unit
Why the euro in your pocket rises and falls against the rest of the world.