The currency exchange market is an online global decentralized exchange for the currency trading of various currencies. This market decides international currency rates for each currency based on its current exchange rate and spot price. It includes all the aspects of purchasing, selling and trading currencies in current or predicted prices. This trading is done both through electronic and manual systems.
Foreign exchange rate is one of the most important factors determining the value of any currency. Every country’s currency exchange rate is largely dependent on the political and economic policies, which governs the country, in addition to external factors such as economy, finance, etc. The exchange rate between two currencies is also greatly affected by the trade balance. Basically, the foreign exchange business is divided into three major categories: foreign exchange one currency | exchange | currency exchange businesses | exchange rate} Foreign exchange two currency pairs: These are the most common currency exchange businesses. They involve the purchase of one currency and the sale of another. They are typically executed on a 24 hour basis and are usually done through banks. Major currencies used in these types of transactions are U.S. dollar/Japanese Yen, U.S. dollar/Swiss Franc and U.S. dollar/Swiss New Zealand Dollar.
Foreign exchange three currency pairs: These currency exchange businesses involve the purchase of one currency and the sale of another. In this case, the most popularly traded currencies are U.S. dollar/Great Britain pound, U.S. dollar/Swiss Franc and U.S. dollar/Japanese Yen. Besides, they are also used in other countries’ domestic markets. These are the most commonly traded currency exchange rates between foreign countries.
The four major factors that determine the exchange rates of the financial assets are interest rates, inflation, credit growth and trade balances. Most of the time, it is the interest rate that is most responsible for influencing the rates. Interest rates are essentially the amount of money that creditors lend to debtors at high interest rates. In inflation, it is the increase in prices as measured by the Purchasing Managers Index (PMI). Credit growth or increase in credit availability is basically the increase in bank loan interest rates that are needed to be able to extend or make new loans to the borrowers. And lastly, trade balances that are all the products of the international financial institutions and are mainly dependent on the supply and demand between nations.
On the other hand, the four economic factors that are very important in determining the fixed exchange rates are currency risk, inflation, trade balance and financial liabilities. As mentioned above, currency risk refers to the rise and fall of the value of the particular currency against that of the main currency. On the other hand, inflation is basically the increase in the general price level or the total cost of living of a country while trade balance refers to the difference between the gross domestic product and its trade balance. Meanwhile, financial liabilities refer to all the obligations that a government has created including its currency, guarantees and securities.
In relation to the exchange rate, the inflation can affect the exchange rate depending on the actual market conditions. In inflation, the goods and services that are bought by the public are altered either because they increase in value or decrease in value. This usually happens due to the rising prices of essential commodities or the growing demands for such products. With respect to the trade balance, if the country’s domestic currency is strengthening versus that of the foreign currency, then this can have a strong impact on the exchange rate.
The other factors that affect the exchange rate are foreign currency risks, political risks and the involvement of another country. This means that you can have an advantage when you are going to buy or sell the US dollar through another country since you will not have to pay an international transaction fee. However, there are also other advantages when you are going to do the same since you might get the chance to get the dollar at a cheaper price. This can be a very effective strategy if you know how to do it right.