Currency Exchange Foreign : How It Is Being Valued

It all started with Money

In order for you to be able to buy goods, you need to have a universally accepted medium in an economy that both buyers and sellers of goods and/or services would recognize as a form of payment. Previously, a barter system was in place to exchange goods and services. However, the difficulty arises when looking for a trader who would need your product or service and at the same time you would also be requiring his product or service.

For example, if you want to buy a television and you are selling furniture, you have to look for a trader who is selling the television but at the same time would need furniture that you are selling. The probability of finding the right trader for the right situation is really small. Thus, to address this difficulty, money was then invented.

With money, individuals will no longer need to stock a diverse collection of goods and/or service in his or her inventory for exchange. Money permits the buying and selling of various products and services even if you want to buy it from abroad. A Foreign Currency Exchange Rates market would come in handy as discussed in the next paragraph.

A Country’s Currency

In a single economy, money can be identified under a unified single currency. For instance, the United States recognizes the dollars as their currency. Other countries would also have a different currency, like the Yen for Japan, Francs for Switzerland, and British Pound for the United Kingdom. So if you want to purchase a product or service beyond your national borders, then a Foreign Currency Exchange Rate transaction will be required.

The purchase will be done in the Foreign Currency Exchange market. For example, if you want to buy Japanese Anime Movie, then you have to purchase it using Yen as the currency. Since you are in the United States, and your currency is the dollar, you have to access the Foreign Currency Exchange market to buy yen in exchange of your dollars. You can now use your yen to purchase the Anime Movie in Japan and thanks to the Foreign Currency Trading market.

Supply & Demand

The exchange rate of a dollar per yen provided by the Currency Exchange Foreign Rate market would depend on the supply and demand of that specific foreign currency. However, the supply and demand in the Foreign Currency Exchange market are determined by several factors and market variables which include price levels, interest rates, productivity, and a country’s economic stability.

Another important factor in determining the exchange rate offered in the Foreign Currency Trading market is the rate of inflation of the country. Moreover, the interest rate of a country would also affect the equilibrium of currency prices.

If the Federal Reserve decides to abruptly increase the interest rates, investors from around the world would increase their demand for assets that are dollar-denominated, thus increasing the demand for dollars in the Foreign Currency Exchange market. An increase in demand for the dollars would cause the dollar to appreciate while other currencies will tend to depreciate.

Productivity

In addition, a country’s productivity can also affect the prices of currencies. For example, if China increases its productivity, china would become more competitive in the global market. Demands for their products and/or services would rise which will consequently also increase the demand for its currency in the Foreign Currency Trading market.

As mentioned, economic stability as well as political stability affects the prices of the currencies. If the war in Iraq will still continue, foreigners and investors will shy away form Iraq and will put their savings and capital to other countries. Hence, this will result in a low demand for Iraq’s currency in the Foreign Currency Exchange market.

The above mentioned system of fluctuating currency value in the Foreign Currency Exchange market is called the flexible-exchange rate system. However, there are several countries wherein its currency’s exchange rate offered in the Foreign Currency Trading market is fixed. This is called the Fixed-Rate System. An example of a country using a fixed rate system is the United Arab Emirates.

The dirham, the currency of United Arab Emirates, is fixed to 3.65 dirhams per dollar in the Foreign Currency Trading market. In order to maintain the value of 3.65 dirhams per dollar, the central bank intervenes and performs the necessary transactions in the Foreign Currency Trading market. Depending on the situation, the central bank may decide to buy or sell dollars in the Foreign Currency Exchange market just to maintain the currency equilibrium.

Conclusion

It is vital for the world market to have an efficient and well functioning Foreign Currency Trading market. Currency prices are determined using flexible-exchange rate system or the fixed-exchange rate system. For the first system, several factors affect the currency price. However, it is purely affected by the supply and demand. For the fixed-exchange rate system, a country’s central bank will have to intervene by either buying or selling the currency in the Foreign Currency Exchange market to maintain the price.

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