Currencies can only change their value relative to each other – so FX traders mainly refer to them in pairs. For brevity, they also assign each currency a three-letter abbreviation. So the US dollar is “USD”, the Japanese yen is “JPY”, the British pound is “GBP”, and so on.

Traders might say they’re “buying USD/JPY” (a currency pair), which means they think America’s currency will strengthen against its Japanese rival. That means they think that in future, $1 will be able to buy more yen than it can today. Buying USD/JPY means you’re buying dollars and selling yen. If the dollar does strengthen, you can then sell your dollars, which will now buy you more yen – and make you a profit.

Unlike moves in stocks, daily currency fluctuations are rarely dramatic. Instead, you’ll normally see constant tiny changes of a fraction of a percent, which might add up to a chunk of change over time. The more you put in, the bigger your returns – but only if you’re right about which direction the currency goes in. 💰

What moves the value of currencies?

Macroeconomics always has a finger (or three) on the scales:

🔹 Interest rates: Higher interest rates in a country mean a greater return on its investments, so investors buy more currency to invest there – driving up its value.

🔹 Trade balance: If a country is exporting more than it imports, lots of people overseas are buying the country’s currency in order to pay the exporters for their goods – and the high demand will boost that currency’s value.

🔹 Politics: Events like elections and referendums can squash currencies. Market belief that a new leader’s policies might hurt the government’s finances or economic growth can undermine a currency’s value. Fewer people will want to invest – and lower demand for the currency equals lower prices. ⚠️

Is speculation the only game in town? You can attempt a “carry trade” to exploit the difference in interest rates between countries. Since Japanese interest rates are much lower than in the US, you could borrow yen, swap them for dollars, and then invest those dollars in American government bonds.

Once you’ve got a satisfactory return, you can sell the bonds, convert your dollars back into yen, and pay back your Japanese loan. Your profit is simply the interest rate you’ve been paid on the bonds, minus the cost of borrowing – if the exchange rate has stayed constant. But if the dollar weakens during the trade, your swapping might not peso good.