The Basics of Forex Rates
The foreign exchange market is a widely distributed financial market that deals with the trading of different currencies. In this kind of global financial market, forex rates are always involved. To the people who are engaged or who are still planning to engage in foreign exchange trading, knowledge on forex rates is really of prime importance because they are the ones that are primarily and mainly tackled in the forex market. Basically, forex rates are exchange rates between currencies involved. Forex rates then are those in which one currency is exchanged to another currency. Forex rates and even other exchange markets are very important for the global economy because they help in businesses involving international trades and investments. Since the term “rate” refers to ratios and proportions, forex rates then mean the value of one currency against another currency. To better understand this, an example is given. Say for instance you have 10EUR then it was exchanged for 100USD. The foreign exchange rate then is that 1EUR = 10USD. To put it into perspective, forex rates are simply the value of a certain curreny as compared with another currency. Other money dealers usually have different forex rates as compared with that of the retail market. This is because they also incorporate their profit in trading in order to have higher gains. Otherwise, going into forex market would be useless. Many people actually wonder why forex rates keep on changing. As people may have observed, forex rates can never be static for a number of days. Every single day
Forex rates either go up or down depending on the economic status of a certain nation.
Why Forex Rates Change
There are lot of things that you have to go into in order to understand the reasons behind changes in forex rates. In economics, different factors have direct or indirect influences over the change of certain economic events. In the case of forex rates, there are six identified factors that lead to the changes of forex rates from one currency to another. Each of the factors are discussed as follows:
(A) Purchasing Power. This theory is believed to be one of the most important reasons why values of currencies as compared with other currencies fluctuate, thus, the change in forex rates occur over time. Some theorists believe that the value of goods should be of the same amount in different countries. Following this theory, countries that sell goods at a cheaper price shall increase the value of their currency as compared with those countries that sell the goods at a higher price. This then would lead to the strengthening or even weakening of a certain currency against another currency.
(B) Intererst Rates. The next reason why forex rates change is due to the changing interest rates. Relative interest rates refer to the size of the disparity between the agreed or the real interest rates against the inflation rate. If interest rates increase, then the forex rates also have to adjust in order to compensate such increase.
(C) Trade Imbalances. If there is a trade deficit between two countries, forex rates become unstable. Forex rates start to change because there will be an imbalance of currency reserves between the countries involved due to the fact that there was a deficit in trade between them.
(D) Unstable Government. As always, the economy’s strength will always be affected by politics. If a country is ran by a government that is true, it builds confidence to its people as well as its foreign investors. With this, the country’s economy rises, thus, forex rates also strengthen. However, if the government is so ill, the economy also becomes unstable leading to the weakening of forex rates.
(E) Interventions of Government. The value of a currency is so significant for the government in order to build a wealthy country and a wealthy people. If the government is able to intervene with the economic demands of foreign investors, like the production of domestic goods for export, the economy will also rise, therefore leading to a change in forex rates.
Speculators. Last on the list are the speculators. They are those who have the purchasing power to buy or sell any currency. Their actions almost always have significant effects on the fluctuations of forex rates because again, they are the ones who purchase or sell the currencies.