sharply after their inflated advances earlier in the decade.
After a long pause through the spring and early summer of
2008, the sell-off accelerated again in mid-2008 as carry traders
with only a few years’ experience learned the hard way
that what goes up comes down. They also learned that earning
a few pips a day on a carry trade was not trading at all.
The bright side of this situation for experienced traders was
that after the carry trade evaporated, two-way trade resumed.
After the majority of the speculative money was wiped out,
prices were free to move up and down, which is what markets
do in normal conditions.
Inflation and Commodities
An important link between interest rates and currency values
is commodity inflation, which, unlike an individual area or
country’s business activity, affects all economies. As inflation
rises and prices spiral upward, some people quickly start to
buy up future supplies of basic necessities as insurance against
higher prices in the future. In that scenario, prices go up not
because of healthy business activity but because of uncertainty
and fear—and fear moves markets. In that scenario the government
can increase the interest rate earned on cash deposits
to get individuals to sell off their stockpiles of supplies in
exchange for cash and the increased dividend created by
higher interest rates. This seems a responsible action but does
not work in all cases. Some individuals are inclined to hang
on to their supplies rather than take the cash, and attempts at
easing inflation can be thwarted.
sharply after their inflated advances earlier in the decade.
After a long pause through the spring and early summer of
2008, the sell-off accelerated again in mid-2008 as carry traders
with only a few years’ experience learned the hard way
that what goes up comes down. They also learned that earning
a few pips a day on a carry trade was not trading at all.
The bright side of this situation for experienced traders was
that after the carry trade evaporated, two-way trade resumed.
After the majority of the speculative money was wiped out,
prices were free to move up and down, which is what markets
do in normal conditions.
Inflation and Commodities
An important link between interest rates and currency values
is commodity inflation, which, unlike an individual area or
country’s business activity, affects all economies. As inflation
rises and prices spiral upward, some people quickly start to
buy up future supplies of basic necessities as insurance against
higher prices in the future. In that scenario, prices go up not
because of healthy business activity but because of uncertainty
and fear—and fear moves markets. In that scenario the government
can increase the interest rate earned on cash deposits
to get individuals to sell off their stockpiles of supplies in
exchange for cash and the increased dividend created by
higher interest rates. This seems a responsible action but does
not work in all cases. Some individuals are inclined to hang
on to their supplies rather than take the cash, and attempts at
easing inflation can be thwarted.
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