Global trade has increased over the years due to many reasons. Primarily of course the need to import and export goods between countries necessitated the transference of money from one border to another. It is from this position that the foreign exchange market grew and now encompasses not only the transactions that facilitate trade between countries but also the trade of currency pairs for profit. The currencies have to be converted from one to another for trade between nations. This is done in the foreign exchange market. The foreign exchange rate is the name given to the amount of a currency that is required to purchase another currency. The currency conversion is done in the foreign exchange market or the Forex or FX market as it is better known. The Forex market is bigger than all the other markets combined and the annual trading in all these markets is only equal to a few days trading in the Forex market.
There are three primary factors that affect the exchange rate. Establishing foreign exchange rate depend on government intervention, inflation and the demand and supply for that currency.
• Government intervention: The central bank of a country is able to dictate the terms of the exchange rate. When the foreign exchange rate rises it becomes more expensive to borrow. As the money that is in circulation reduces the foreign exchange rate will increase. The reverse of this equation is also true.
• Inflation: Inflation of a country also affects its currency’s exchange rate. When the value of a currency decreases we see that the currency prices are on the rise. The effect that this has on the normal consumer is to vastly reduce their buying power due to high prices even though their budget remains the same.
• Supply and demand: In the Forex market the general rule is that if the demand for a certain currency increases then the exchange rate rises along with it. Even though currency trades rely on this rule whenever an exception to it occurs they are bound to suffer great losses. The final exchange rate is actually decided by the demand that is there for that currency.
So, we see why traders in the Forex market has to keep a close watch over the exchange rates of currencies. Vigilant trading will enable the traders to make a profit from trading currency online.