What Are Leading & Lagging in Foreign Exchange?

by Fraser Sherman; Updated September 26, 2017
One Euro coin

In the world of forex -- foreign exchange investing -- "leading and lagging" have more than one meaning. Leading and lagging indicators provide clues to how currency exchange rates may be changing. Leading and lagging also refers to adjusting payments to take advantage of exchange-rate swings.

Leading and Lagging Indicators

A leading indicator is a sign which way the market is heading. If a country's stock market drops, that's a sign of economic trouble. A forex trader may predict that this will result in the country's currency -- yen, euro, Australian dollar -- changing in value. A lagging indicator comes after a downturn or upturn in the economy and confirms which direction the economy and the currency are going. Some economic indicators are specific to the forex market. For example, analyzing previous trading periods to interpret current patterns is a kind of lagging indicator.

Timing Payment

If your business has substantial investments overseas, a change in currency rates can cost you. Suppose you're about to pay a bill to a French supplier. If the value of the euro compared to the dollar goes up right before you settle a debt to a French company, you're going to have to pay more dollars. "Leads and lags" is a strategy for ducking that problem. If you believe the euro is going up in value, pay your bills before it happens. Lagging takes the opposite approach: when you expect a currency to drop in value, delay the transfer so you're paying fewer dollars.

About the Author

A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.

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