- The currency rate is a ratio between two currencies that tells you how much one is worth in relation to the other. For example, the Euro and U.S. dollar exchange rate will be quoted like this: EUR/USD = 1.4375, meaning that at the time of the rate quote it took $1.4375 to buy onee Euro. Actual (current) exchange rates are sometimes called spot rates. Forward exchange rates state a specific exchange rate parties have agreed to with the currency being traded to be delivered at some point in the future.
- Following World War II most currencies were "pegged" to the U.S. dollar in an effort to promote stability. By the late 1960s this system proved to be a hindrance to capital flow and economic growth. In 1971 currencies were allowed to "float," and their exchange rates determined by market forces. By the 1980s the foreign exchange market had a volume of $70 billion daily. The advent of electronic funds transfer and the growth of the Eurodollar market (funds deposited in foreign financial institutions) resulted in massive growth in currency exchange, which averaged $3.2 trillion each day as of 2007.
- When a nation's currency rises in relation to another currency, its export goods become more expensive, but imports from the other country will be cheaper. This applies to travel as well. For example, if the dollar is "strong" against the Euro, U.S. travelers in Europe find their dollars will buy more Euros, making shopping more affordable. The European coming to the U.S. has just the opposite experience---his Euros buy fewer dollars and purchasing U.S. goods is therefore more expensive.
- A variety of factors influence currency exchange rates. Inflation rates higher than in other countries makes a currency less valuable and tends to drive down its currency exchange rate. This in turn makes the country's exports more attractive, but increases the cost of imported goods. A trade deficit or government deficit spending and excessive public debt tend to have a similar effect. Relatively high interest rates exert upward pressure because the greater return makes the country's currency more attractive, increasing demand. For some nations, political instability is an issue. Investors will discount currencies if the viability of the issuing government is uncertain.
- Currency exchange rates fluctuate constantly, responding to market trends and speculative trading as well as broader economic forces. About 80 percent of currency trades are made by speculators hoping o profit off these variations, not institutions transferring funds. The foreign currency market (also called Forex or FX) is a largely unregulated network of banks, currency dealers and traders. Trades are routinely made with extremely low margin requirements (with ratios of currency to margin as high as 400:1). This means a trader can purchase $100,000 worth of a foreign currency with as little as $250 up front. This margin trading makes the currency exchange market potentially very profitable, but also extremely risky.
Comments
vcraw said
on 7/15/2009 To have a look at live currency exchange rates, click here http://www.currencysolutions.co.uk/index.asp?PageID=1030.