The Four (4) W’s of Buying Foreign Currency

What do you mean by buying a foreign currency?

It is the act itself of purchasing a currency that is not the generally accepted form of money which is being issued by your local government and is circulated within your national boundaries and within your economy. An example would be if you are in the United States, your generally accepted form of money is the US dollar.

However, if you are residing in Germany, then your local money that is being circulated and utilized in business transactions is the Euro. Hence, if you want to obtain Euros, then you have to buy that foreign currency. When you buy foreign currency, the price is determined by its current exchange rates. The foreign currency exchange rate varies from time to time and is literally influenced by the supply and demand of the currency in question. The supply and demand of a currency is also largely influenced by several issues including economic factors, political conditions, and market psychology. Therefore, when buying foreign currency, you should try to consider these factors.

Economic Factors include policies disseminated by government agencies such as central banks, conditions of the economy which are revealed through several economic reports provided by government and non-governmental institutions, and other economic indicators.

Political Conditions can be internal, regional and international. This issue will profoundly impact the value when buying foreign currency. For instance, if a nation is currently under a political struggle in terms of leadership, it could raise doubts to the investors, negatively decreasing investor’s confidence, thus consequently lowering the value of that nation’s currency.

Market Psychology and the perceptions of the traders in a specific market could also affect the price of a foreign currency.

Why do you have to buy foreign currency?

There are several reasons why individuals and/or companies buy foreign currency. One of the major reasons is for international transactions. An individual who wants to travel outside of his home country would need to buy a foreign currency that is being used in the country that he will be traveling to. Although some countries readily accept other currencies, like the United Arab Emirates accepting the US dollar for transactions, nevertheless carrying with you their local currency will make everything easier. For business and companies, in order for them to transact internationally, they have to pay their suppliers, vendors and service providers in their respective currencies, thus, the need for them to buy foreign currency.

Another reason why people buy foreign currency is to take advantage of the fluctuating exchange rates. Since foreign currency exchange rates go up and down every second, companies and traders who are into the foreign currency trading can earn profits from the fluctuations. Buying foreign currency can also secure companies and individuals from loss due to such fluctuations of currencies.

Where do you buy foreign currency?

Today, buying foreign currency can be done in just a second, if we are to talk about doing it online via a foreign exchange trading platform. Foreign currency trading platforms which are normally offered by retail forex brokers, allows an individual or a company to buy currency in the exchange market at a foreign rate from the comfort of their office or home. This foreign exchange market is where the buying and selling of foreign currency occurs. Although, there is no actual trading floor for this currency exchange compared to the New York Stock Exchange, the transaction is completely legal which also contributes to its extreme liquidity and high trading volume.

Aside from these trading platforms from retail forex brokers, you can also buy foreign currency from several financial institutions such as banks, cash offices, money exchangers, and other establishments. Since buying foreign currency is very easy and available especially in metropolitan areas, these financial institutions will compete with each other in terms of offering the best price to the individual or company who would like to buy foreign currency.

Who do you think buys foreign currency?

Business and individuals are not the only ones who buy foreign currency. There are numerous entities which are engaged in buying foreign currency. These are:

• Banks - Obviously, they are the major buyers and sellers of foreign currency.
• Commercial Companies - As mentioned previously, in order for commercial companies to be able to transact internationally, they should buy foreign currency as payments to their international suppliers and vendors.
• Central Banks - They play a very important role in the foreign currency trading. In order to control and stabilize the economy, the central banks will have to intervene whether to buy or sell foreign currency depending on the market conditions.
• Investment management firms - An international investment firm needs to buy or sell a foreign currency in order to pay the purchases of foreign equities.
• Retail Forex Brokers - They allow traders and investors to invest in the foreign exchange market at a minimal cost offering an advantage of leverage.

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