Did you know that the foreign exchange market forex
is the largest market in the world? In fact, more than $3 trillion is
traded in the currency markets on a daily basis, as of 2009. This
article is certainly not a primer for currency trading, but it will help
you understand exchange rates and fluctuation.
What Is an Exchange Rate?An exchange rate is the rate at which one currency can be exchanged for another currency. In another words, it is the value of another countries currency compared to that of your own. If you are traveling to another country, you need to "buy" the local currency.the exchange rate is the price at which you can buy that currency.
Fixed Exchange Rates
There are two ways the price of a currency can be determined against another currency. A fixed, or pegged, rate is the government (central bank) sets and maintains as the official exchange rate. A set price will be determined against a biggest world currency (usually the U.S. dollar, but also other major currencies such as the euro, the yen or a basket of currencies). In order to maintain the local exchange rate, the central bank buys and sells its own currency on the foreign exchange market in return for the currency to which it is pegged.
Floating Exchange Rates
Unlike a fixed rate, a floating exchange rate is determined by the private market through supply and demand. Look at this easiest model: of demand of a currency is low, its value will be low, thus making imported goods more expensive and stimulating demand for local goods and services.In this turn will generate more jobs, causing an auto-correction in the market. A floating exchange rate is constantly changing.
In fact, no currency is wholly fixed or floating. In a fixed regime, market pressures can also affect changes in the exchange rate.Occasionally , when a local currency reflects its true value against its pegged currency, a "black market" (which is more reflective of actual supply and demand) may develop. A central bank will often then be forced to revalue or devalue the official rate so that the rate is in line with the unofficial one, thereby halting the activity of the black market.
In a floating regime, the central bank may also intervene when it is necessary to ensure stability and to avoid inflation. However, it is less often that the central bank of a floating regime will interfere.
What Is an Exchange Rate?An exchange rate is the rate at which one currency can be exchanged for another currency. In another words, it is the value of another countries currency compared to that of your own. If you are traveling to another country, you need to "buy" the local currency.the exchange rate is the price at which you can buy that currency.
Fixed Exchange Rates
There are two ways the price of a currency can be determined against another currency. A fixed, or pegged, rate is the government (central bank) sets and maintains as the official exchange rate. A set price will be determined against a biggest world currency (usually the U.S. dollar, but also other major currencies such as the euro, the yen or a basket of currencies). In order to maintain the local exchange rate, the central bank buys and sells its own currency on the foreign exchange market in return for the currency to which it is pegged.
Floating Exchange Rates
Unlike a fixed rate, a floating exchange rate is determined by the private market through supply and demand. Look at this easiest model: of demand of a currency is low, its value will be low, thus making imported goods more expensive and stimulating demand for local goods and services.In this turn will generate more jobs, causing an auto-correction in the market. A floating exchange rate is constantly changing.
In fact, no currency is wholly fixed or floating. In a fixed regime, market pressures can also affect changes in the exchange rate.Occasionally , when a local currency reflects its true value against its pegged currency, a "black market" (which is more reflective of actual supply and demand) may develop. A central bank will often then be forced to revalue or devalue the official rate so that the rate is in line with the unofficial one, thereby halting the activity of the black market.
In a floating regime, the central bank may also intervene when it is necessary to ensure stability and to avoid inflation. However, it is less often that the central bank of a floating regime will interfere.
Euro Exchange Rate
