The Impact of Fiscal Policies on Currency Market Volatility

Currency fluctuations in today’s world financial system are more to an extent determined by fiscal policies of nations that are members of the global forex trading market. They influence economic policies in order to meet the nations’ short and long-term balance of payment goals. Such instruments of fiscal-monetary policies can include changes in taxation measures, spending activities as well as public investment among others. In this respect, it would be useful to look at the relationship of fiscal policies with fluctuations in currency markets.

In fiscal measures, stabilization of a nation’s economy is most probable to affect an investor’s attitude, in essence affecting currency markets. Forex traders, currency speculators, and participants in the global market modify their portfolios, purchase or sell currencies or opt for hedging, resulting in a fluctuation of prices of currencies given changes in government policies. The effects of fiscal policies may be felt more when some of the adjustments are even larger such as tax reductions, increased investment or spending among other areas.

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Central monetary authorities can also use their instruments and policies to mitigate the impact of fiscal policies on the changes in the foreign exchange rate. Such may include changes in interest rates, purchase or sale of government securities in the market, or distorting the foreign exchange market rates among others. Where fiscal policies exacerbate fluctuations in the currency market, central banks may intervene through the provision of funds in the financial market to support the value of the volatile currency. On the other hand, they may use policies to make it more difficult to borrow funds when the particular fiscal policy under consideration is unsustainable with inflation and overheating of the economy.

Fiscal and monetary policies can sometimes harmonize as the fates of the two policies’ success on controlling fluctuation within the market for the currency involved. Sometimes, government policies when well synchronized with central bank policies, the result can be more desirable than a fixed rate of exchange. However, there are situations when there is a mismatch between fiscal and monetary policies to increase fluctuations and get unwanted outcomes in the forex trading market.

Fiscal policies also reflect on the long-term stability of the nation’s currency in the long run. Political elites who practice responsible taxation and expenditure regimes, sensible public outlay, reasonable borrowings, and practicing fiscal discipline foster long-run economic growth thus backing a more sound currency. On the other hand, reckless monetary management, which can create debt, fiscal deficits and slow growth may lead to depreciation of the currency as well as increased fluctuations in the market.

To forex traders, it’s important to know how fiscal policies may affect the volatility of currency markets. The knowledge can therefore be used by professional traders to make informed trading decisions. It can facilitate their estimation of threats and opportunities that accompany changes in fiscal policies. They might be able to exploit such volatilities from the forex market if they master the art of monitoring policy statements, economic variables and government actions that may spur a change in the market.

Due to movement in policies of government, the forex traders as well as the other participants in the forex market change their cumulative positions thereby changing the prices of the currencies. It is therefore appropriate to analyze the mutual connections between fiscal and monetary policies in order to avoid sharp fluctuations in currency markets and provide sustainable economic growth. From the knowledge of these components, traders will be positioned to work on their risks of trading in forex.