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 The most important element on the foreign exchange market is the exchange rate. The forex market is fundamentally created based on the currencies exchange rates. The exchange rate between two currencies shows how much one currency values compared with the other.
Let’s take for example an exchange rate for USD and EUR. If the exchange rate USD/EUR is 0.71 this means that $1 is worth €0.71. If the two currencies are compared the other way around the rate EUR/USD is 1.40, meaning that €1 is worth $1.40. These are actual buy/sell prices for the two currencies.
In finance, the exchange rates are used for current values (spot exchange rates) and for future values (forward exchange rates). The whole forex market is based on the rates between different currencies because they represent the actual price paid or the money collected in one currency to buy or sell one unit of another currency. The exchange rated depend mainly on the demand and the supply of the two currencies quoted. A currency will increase its value when the demand is higher and will lose some points if the demand is smaller or the supply is higher. The demand of a certain currency can depend on a wide variety of factors starting with the financial and economic situation of the country to which the currency belongs to, and ending with the geo political situation worldwide. Many economic, political and social events affect the exchange rates daily, and sometimes even natural disasters can influence the forex market exchange rates. The exchange rates on forex are moving free according to the supply and demand. Yet, some countries can slightly manipulate their national currency’s rate to maintain it at a more favorable level. It seems that China, Brazil and Japan kept artificially lower rates for their currencies to pass easier over difficult economic times. |
