Look anywhere and you’ll only see bad news about economy, I mean any country. Poor production, low consumption, job loss, you name it. What does it mean to the forex market? Nothing much! Really, nothing much. Why? Because currency exchange rates are driven by comparisons between 2 corresponding economies of each currency pair. But the current downturn is widespread globally, sparing no country. So stating that currency exchange rates are affected by the on-going economic crisis is not sufficient.

But there’s a basis behind that statement. Although exchange rates are products of comparing related economies, the USD and CHF seem to do well in global economic downturn. The reason is that those currencies are considered stable, or low risk. And because when global economy gets into recession, it’s risky to distribute assets in currencies of smaller countries (or group of countries) such as Singapore or Hong Kong (in comparison to the United States). The common sense is that, in worst scenario such that smaller economies collapse completely, the bigger ones may have much better chance to survive and recover. For that reason, the USD do well in risk-aversion time because the US economy would be considered too big to collapse entirely, in comparison to others.

But how about the Japense Yen? I think not. The only reason Yen crosses kept falling during the past few weeks is because these crosses carry higher interest rates (for example, GBP, EUR or NZD). These currency crosses are expected to fall further due to rate-cut projections, while the Yen is already at its extreme bottom.

Anyone with the right mind would say the situation can’t get better any time soon, at least for another 6 months or so. As a matter of fact, the most optimistic economists agree that recovery should be seen in the 3rd quarter of 2009. So how would you predict the forex market? Risk aversion and safe haven, I bet, traders will run for the USD and keep selling Yen crosses as a major trend.