Inter-market correlations can say a lot about a specific nation’s currency. Take the U.S. dollar as an example. When the Dow Jones is performing well, the dollar tends to perform well also. Take February 11th, 2011 as an example. The dollar rose in value in comparison to the yen, the Euro, and the pound. The Dow Jones also rose a modest 43.97 points. In this case, it looks like the better the U.S. economy is doing internally, the better it does externally as well.

This is not the case universally. Historically, the yen has performed in a negative correlation to the Nikkei, the major Japanese stock exchange. This might seem odd at first. Why would the yen move in the opposite direction of the internal stocks? To gain a deeper understanding of this, you must look at the worldwide forex market. For starters, the majority of Japanese investors are adverse to risk. So rather than putting all of their eggs in one proverbial basket, they diversify their investments. This means investing in foreign currencies in addition to the domestic market. This method of investing eliminates the risk that comes with investing in a lone nation’s economy.

By keeping on top of how different nations’ domestic market perform in correlation to their currency, you can gain a deeper insight into where prices will go. These changes rarely perform in lock-step with each other, so watching a domestic market can sometimes give you a jump on where currencies are headed. This advantage will potentially help you stay ahead of other traders.