Financial markets today are intertwined. Even though the forex market is the “grand daddy” of all other markets based on sheer size and daily volume, currency movements are correlated to other smaller financial markets, namely gold and oil. Here's an analysis of how movements in gold and oil impact the forex market.

Gold

Gold has always been a valuable investment option, an alternative to the U.S dollar, and even as a hedge against inflation. While it is true that the long term correlation between the gold and the forex is just the opposite that is when the US$ is trading low, the price of gold is higher and vice versa, the short term correlation between the two is almost zero as each market reacts based on its own internal dynamics and liquidity.

Perhaps it might be concluded that the gold market, which is significantly smaller than the forex market depends more on the performance of the forex market, rather than the other way around as it is often seen. That said any intense fluctuations in the gold prices could influence the US $ and invoke the law of inverse movements and plunge the value of the dollar.

Oil

Now this is a ‘slippery' area where many new forex traders go berserk thanks to the misinformation doing the rounds! The raw connection that one can see is that the currencies of the biggest oil producing countries could rise or fall depending on the increase or decrease in their oil productions. Another theory is that the currencies of the oil importing countries will fall when the oil prices shoot up.

However, correlation studies on the impact of oil on the forex market have shown no such strong relationships between the two especially on the short term which is the focus of most currency trading. Perhaps the best way to track the currency market movement is to ascertain the long term correlation between oil prices and the forex market from the inflationary viewpoint and its impact on the economic growth. For example an increase in global oil prices could mean higher inflation and a slow-down in the country's economic growth which could impact the movement of the US$. Except for this one the impact of oil on forex is only as good as the other financial markets.

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