Currency and Exchange Rates

Confused with Currency Exchange Rate? Let’s review the basics of it.

How can you trade something that you can’t see or touch? Since trading currencies isn’t something physical forex might seem confusing in the beginning. One way to brush the confusion away is to think of buying a currency in the same way as you think of buying shares in a particular country.   

EXAMPLE: Let’s say, you decided to buy Japanese Yen. What exactly did you do? You bought a share in the Japanese economy. The value of the currency is an upfront indication of what the market thinks of Japanese economy today and in the future. 

 What Does Exchange Rate Show?

The exchange rate of a certain currency against currencies from other countries shows the condition of that country’s economy compared to the other countries’ economies.  

What Is The Most Traded Currency?

Currently US dollar (USD) is the most traded currency. Other major currencies after US dollar are:

CurrencyCountryForex Symbol
DollarUSAUSD
EuroEuro membersEUR
YenJapanJPY
PoundGreat BritainGBP
FrancSwitzerlandCHF
DollarCanadaCAD
DollarAustraliaAUD
DollarNew ZealandNZD

How is the currency trading performed?

Currencies are traded in pairs: For example the Euro dollar and the US dollar (EUR/USD) or the British pound and the Japanese Yen (GBP/JPY). In order to start trading, you have to read forex brokers reviews and choose the broker to trade with.

Interest rates, money supply, and financial stability all affect currency exchange rates. Because of these factors, the demand for a country’s currency depends on what is happening in that country.

First, the interest rate paid by a country’s central bank is a big factor. The higher interest rate makes that currency more valuable. Investors will exchange their currency for the higher-paying one. They then save it in that country’s bank to receive the higher interest rate.

Inflation can affect a currency’s value

Inflation means higher prices and generally lower purchasing power for a country’s currency. If a country experiences inflation, the prices of its exports increase, making them less attractive to foreigners. Inflation can also decrease domestic demand for domestic goods, leading a country’s importers to exchange their currency for foreign ones in order to buy cheaper goods from abroad. These two effects—reduced foreign demand and increased supply in the market—both work to push a currency’s value down.

A little bit of inflation—say, prices rising by 1 or 2 percent per year—is normal and the sign of a healthy economy. But hyperinflation, an extreme form of inflation in which prices increase out of control, can drastically weaken a country’s currency. Between 2008 and 2009, Zimbabwe experienced hyperinflation after the government overprinted money, in large part to pay off the massive debt that it had accumulated trying to stave off a domestic food shortage. This led to soaring prices and inflation rates of over 100 billion percent.

Third, a country’s economic growth and financial stability affect its currency exchange rates. If the country has a strong, growing economy, then investors will buy its goods and services. They’ll need more of their currency to do so. If the financial stability looks bad, they will be less willing to invest in that country. They want to be sure they will get paid back if they hold government bonds in that currency. 

KEY TAKEAWAYS

  • An exchange rate is a rate at which one currency will be exchanged for another currency.
  • Most exchange rates are defined as floating and will rise or fall based on the supply and demand in the market.
  • Some exchange rates are pegged or fixed to the value of a specific country’s currency.
  • Exchange rate changes affect businesses by changing the cost of supplies that are purchased from a different country, and by changing the demand for their products from overseas customers.

How To Check the Exchange Rate

If you’re traveling overseas to another country that uses a different currency, you must plan for exchange rate values. When the U.S. dollar is strong, you can buy more foreign currency and enjoy a more affordable trip. If the U.S. dollar is weak, your trip will cost more, because you can’t buy as much foreign currency for the same amount of dollars. Because the exchange rate varies, you might find that the cost of your trip has changed since you started planning it. This is just one of the ways ​exchange rates affect your personal finances.

You can search online to find the exchange rate of the U.S. dollar to foreign currency for any given day. Google has a tool to help with this. It even shows a chart indicating whether the dollar is strengthening or weakening. If it’s strengthening, you can wait until right before your trip to buy your currency.

© ForexExplore.com 2007 – 2024 Trading financial instruments carries high level of risk to your capital with the possibility of losing more than your initial investment. This site will not be held liable for any loss or damage in result from using the information within the site including forex Broker reviews 2024, market analysis, trading signals, learning resources and comparison tables. The data within this website is not necessarily real-time nor accurate and do not represent the recommendations of the employees. Currency trading is not suitable for all investors. Before deciding to trade currency or any other financial instrument please consider consider your investment objectives, level of experience, and risk appetite. While we do our best to provide up-to-date information, we strongly encourage you to verify it directly with the broker of your choice.