Each currency has an overnight lending interest given by the central bank of that country. This is dependent on the country’s economy. If prices of basic goods are high, interest rates are increased, and vice versa. In general, currencies increase in value when their interest rates increase, and decrease when rates fall.
With the help of technology, trading can be done online or over the phone.
In the 1990s, despite reunification issues between East and West Germany, Germany’s mark (the old currency) was stronger than Britain’s pound. Britain wanted to maintain the value of the pound, which led to high interest rates and inflation in the 1990s. As a condition to enter the European Rate Mechanism (ERM), which aimed to lessen unpredictability in exchange rates and attain fiscal stability in Europe, the British pound became fixed at an exchange rate of 2.7 marks per pound. George Soros, a Hungarian-born American businessman and philanthropist, was one of the entrepreneurs who invested in the pound. Meanwhile, in order to invite investors, Britain increased its interest rate to double digits. Recognizing it would lose billions while paying interest costs, it withdrew from the ERM and the value of the pound dropped. Surprisingly, Soros still profited about $1 billion from this. The depreciation of the pound actually helped the UK government as it forced the excess interest and inflation out of the economy, which made it a perfect time for trading. This investment move by Soros is considered one of the greatest currency investments in history.
A trader who worked for Soros’ Quantum Fund, Stanley Drunkenmiller, made the first of his two successful investments during the fall of the Berlin wall. Despite East and West Germany’s reunification issues that led to a plunge of the mark’s value, it did not stop Drunkenmiller from investing millions in a future rally which is caused by a large amount of money entering the market. Meanwhile, Soros persuaded him to raise it to two billion German marks. The result? Millions of dollars in profit.
The strategies of these two men show that one nation can profit from another weaker nation. Experts explain that when a country has a weak currency, their products become cheaper, making them affordable to foreign buyers and increasing sales. Consequently, foreign prices increase and importing costs rise. Ultimately, it’s a win-win situation. In this industry, all it takes is a clever mind and some attitude.