We can explain it in two ways.
In addition to trading a profit or a return, foreign exchange trading can be used to hedge a stock portfolio. For example, if you set up a portfolio of shares in a country with a potential to raise the value of a share, but a risk of insolvency in currency, such as in the recent US, then a trader may own the share. Create a portfolio and shorten the Swiss franc or euro To sell futures. In this way, the portfolio value will increase and the negative impact of the falling dollar will be significant. This is true for investors outside the United States who take their earnings back to their own currency.
A second approach to transaction currencies is to understand baselines and long-term benefits when a currency advances in a particular direction and provides a positive interest rate differential that provides a value in the currency value of the return of the investment. This type of trade is known as “transport trade”.
For example, a trader can take the Australian Dollar against the Japanese Yen. When the original of this article is published, the Japanese interest rate is 0.05%, the most recently reported Australian interest rate is 4.75%, so a trader can earn 4% in this trade.
Nevertheless, such a positive interest should be seen in the real exchange rate context of the AUD / JPY before the decision of interest is given. If the Australian dollar is strengthening against the yen, it would be appropriate to hold the AUD / JPY to gain both the appreciation of the currency and the yield of interest.