Higher Interest Rates No Longer Mean Higher Currencies in Forex Trading

Lower interest rates are getting the attention on the currency market

In recent years, one of the main features of the currency market has been a tendency to reward higher interest rates. Currencies with higher rates did well in forex trading for a couple of reasons:

The higher rates were seen as efforts to keep economic growth under control, so countries with higher interest rates were seen as countries with potential economic growth — and solid underlying fundamentals.
The higher rates drew those with risk appetite who invested in higher rate currencies with proceeds from lower-yielding currencies as part of the carry trade.

Now all of that is changing, and the old conventional wisdom has been tipped on its head. Instead of large returns as a result of riskier investments, forex traders are now looking at capital preservation. The Forex Blog reports on the shift in preference for low-yielding currencies:

This phenomenon suggests that investors are primarily concerned with deflation, and are parking their money in the countries they believe can best preserve their capital, even if the real rate of return is negative.

For now, it appears that this is one of the reasons that the U.S. dollar and the Japanese yen are both doing well right not in forex trading on the currency market. And why gold may see some further gains in commodities trading.