Asset classes often have a strong correlation with forex. This means that currencies sometimes move as a result of the movement of other assets. This article discusses how the prices of bonds, equities, and commodities affect forex rates.
The foreign exchange market is not in isolation
The foreign exchange (forex) market stands as the world's largest and most liquid financial market, with trillions of dollars exchanged daily.
While its sheer volume and constant activity are driven by factors specific to currency pairs, it's crucial to understand that the forex market does not operate in isolation. Instead, it is linked with and significantly influenced by the movements in other major asset classes.
This article will delve into the interrelationships between the forex market and three other critical asset classes: commodities, equities, and bonds.
By understanding how these different markets interact, traders can gain a broader perspective on currency movements, enabling more informed decision-making and potentially more robust strategies.
Commodities and the foreign exchange market
The value of gold
Gold is a physical commodity with intrinsic value, which is tied to its material properties, demand, and supply. The yellow metal is perhaps the ultimate “safe haven” asset, which historically has attracted investors in times of economic crisis.
With all the global economic and geopolitical uncertainty going on, such as tariff policies, ongoing conflict between Ukraine and Russia, and long drawn Middle East tension; it is no wonder that the price of gold has been surging throughout 2025.
US dollar and gold
The value of gold is expressed in terms of the exchange rate between 1 ounce of gold and the USD. Spot gold, or XAUUSD, is traded 24 hours a day worldwide. Thus, the value of gold and the dollar are strongly related.
This relationship is grounded in fundamental market principles. As gold is priced in dollars globally, a stronger dollar means it takes fewer dollars to buy the same amount of gold, which pushes the price of gold down.
Historically, in times of economic uncertainty, investors typically flock to gold as a safe-haven asset, causing its price to rise and the US dollar to weaken. This happens because gold is seen as stable and a reliable store of value compared to other assets.
Swiss franc and gold
As we have just seen, the US dollar has a negative correlation with gold price. On the other hand, the Swiss franc has a positive correlation with gold. This is because both are traditionally considered safe-haven assets. In times of uncertainty, investors will flock to gold and Swiss francs.
Moreover, Switzerland, with its high per capita GDP, also has one of the highest amounts of gold per capita globally, creating an even stronger link between gold and the Swiss franc.
The Australian dollar and iron ore
Australia's main export is iron ore, and a lot of it goes to China. When China's factories are ramping up their production and global demand for iron ore goes up, Australia earns more from exports. This means more people need Australian dollars to buy the ore, which makes the AUD stronger.
When iron ore prices are good, Australia's trade balance (the difference between what it sells and what it buys) improves and potentially results in a trade surplus. A trade surplus will also help strengthen the AUD.
The Canadian dollar and oil
Canada is a major player in the global oil market, and that close relationship significantly impacts its currency. In fact, the Canadian dollar (CAD) is often referred to as a "commodity currency," due to its close relationship to the price of oil.
When oil prices climb, Canada, being one of the world's largest oil producers and exporters, earns more from its oil sales. Since these exports are often priced in US dollars, a surge in oil prices means a bigger influx of US dollars into the Canadian economy. This increased supply of foreign currency strengthens the Canadian dollar.
Moreover, higher oil prices give Canada's trade balance a healthy boost, which supports the value of the Canadian dollar.
Equities and forex
Equities or stocks are usually seen as higher-risk investments compared to fixed-income instruments like bonds.
A bullish stock market shows a surge in investor confidence and risk appetite. During such times, the US dollar, traditionally considered a safe-haven currency, tends to weaken as investors move away from less risky assets. Conversely, currencies associated with higher risk, such as the Australian dollar, will go up.
Conversely, in a bearish market, the reverse will happen. This leads to a strengthening of the US dollar, while higher-risk currencies like the Australian dollar tend to lose ground. This dynamic highlights the intricate relationship between equity market performance, investor sentiment, and currency valuations.
Bonds and forex
Bonds, which are essentially lending money to a government or corporation in exchange for regular interest payments and the return of the principal, offer a more predictable and generally lower-risk return profile. The rate of return on the bond is known as the bond yield.
Bonds are generally seen as a safer investment than stocks, and their movements often go hand-in-hand with the US dollar. Investors globally watch key US government bonds closely, like the 10-year Treasury notes. A bump in the yield on these bonds usually means the US dollar is getting stronger.
During economic uncertainty, investors tend to pull back from riskier assets like stocks and flock to the relative safety of bonds. This increased demand for bonds, especially US government bonds, helps to boost the dollar's value. This "flight to safety" is a well-known pattern in financial markets, where global investors look for secure and liquid assets. US Treasury bonds fit the bill because of the US economy's stability and its role as a global reserve currency.
Key takeaways
It is important for traders and investors who trade forex to understand that asset classes in other markets often have a correlation with currencies. Commodities, equities, and bonds all play a significant role in the value of currencies.
- Rising commodity prices can strengthen the exporting nations' currencies.
- A stock market drop might signal instability, causing investors to sell that country's currency, weakening the currency.
- Higher bond yields attract foreign investment, increasing the demand for a currency.
- Central bank policies, like interest rate decisions, directly influence bond yields and currency valuations.
Understanding how different markets interact provides traders with a broader perspective on currency movements. This holistic approach goes beyond isolated analysis of currency pairs. Traders who monitor these diverse factors can better anticipate trends, manage risks, and develop resilient strategies.
Conclusion
Now that you’ve learned how other asset classes affect the foreign exchange market, you may be looking for resources to help you to monitor the markets in a practical trading setup.
We have a wide range of tools for prop traders in our Tools section. In particular, you may find the Volatility chart and Sentiment tool handy to help you monitor changes.
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