Previously, Foreign exchange was just a concept for governments, large companies, and hedge funds, however, in today’s world, foreign exchange has become so accessible to everyone as many investment companies now offer the chance for individuals to open accounts and trade currencies anytime they choose.
Foreign exchange is the conversion or changing of one country’s currency into another at a specific rate known as the foreign exchange rate, for example, one can swap the U.S. dollar for the euro.
The exchange rate is defined as ” the rate at which one country’s currency may be converted into another.” It is important to understand how exchange rates are determined before trading.
The exchange rates for almost all currencies are constantly floating as they are determined by the market forces of supply and demand. Therefore, most countries float their currencies freely against those of other countries, which keeps them in constant fluctuation.
Foreign exchange transactions can take place on the foreign exchange market, also known as the forex market, and are handled globally between banks as all transactions fall under the auspice of the Bank for International Settlements (BIS). The most-traded currencies in the world are the United States dollar, Euro, Japanese yen, British pound, and Australian dollar.
The Foreign Exchange Market
The foreign exchange market is a decentralized market where all currency exchange trades occur. It is the largest (in terms of trading volume) and the most liquid market in the world.
In addition, it is one of the most accessible financial markets because its participants and traders range from tourists and amateur traders to large financial institutions (including central banks) and multinational corporations.
The foreign exchange market does not only involve a simple conversion of one currency into another, it also involves the application of various financial instruments, including forwards, swaps, options, etc.
The foreign exchange market is not exactly a one-stop-shop as there are a whole variety of different avenues that an investor can go through to execute forex trades.
Factors that Affect Foreign Exchange Rates
Various factors potentially influence the market forces behind foreign exchange rates. The factors range from various economic, political, and even psychological conditions.
The economic factors include the government’s economic policies, trade balances, inflation, and economic growth outlook. Political factors include political instability and political conflicts.
Inflation Rates
This major factor influences exchange rates because a slight change in market inflation can cause changes in currency exchange rates. In addition, when inflation is low, the prices of goods and services increase at a slower rate, therefore, a country with a consistently lower inflation rate exhibits a rising currency value while a country with higher inflation is usually accompanied by higher interest rates.
Interest Rates
A slight change in interest rate will affect currency value and exchange rate. This is because an increase in interest rates will cause a country’s currency to appreciate. After all, higher interest rates provide higher rates to lenders, thereby attracting more foreign capital, which causes a rise in exchange rates and vice versa.
Recession
When a country is experiencing a recession, its interest rates are likely to fall, thereby decreasing its chances to acquire foreign capital. This means that the county’s currency becomes weak compared to that of other countries, therefore lowering the exchange rate.
Terms of Trade
Terms of trade refer to current accounts and balance of payments, the terms of trade are the ratio of export prices to import prices and a trade deficit can cause exchange rates to change.
Government Debt
This refers to public debt or national debt owed by the central government and this affects the exchange rate because a country with so much government debt is less likely to acquire foreign capital, leading to inflation.
A Country’s Balance of Payments
This consists of the total number of transactions including its exports, imports, debt carried out in
a country and this reflects the country’s earnings on foreign Investment.
Featured Image Source: NairametricsGot a suggestion? Contact us: editor@connectnigeria.com
You might also like:
- KPMG Nigeria Opens Applications for 2025 Graduate Trainee Program
- How to Secure Credit from the Nigerian Consumer Credit Corporation
- How To Fund Your Creative Project with Kickstarter
- Top 10 Investment Options for Nigerian Entrepreneurs
Ηi would you mind sharing which blog platform уou’re using?
I’m planning to stаrt my own blog in the near future but I’m
having a tough time choosing between BlogEngine/Wordpress/B2ｅvolution and Drupal.
The reason I aѕk is because your design and style seems
dіfferent then most blοgs and I’m looking for something
uniԛue. P.S My apоlogieѕ for being off-topic but I had to ask!
I don’t know whether it’s jսst me օr if perhaps everyone
eⅼse encountering problems with y᧐ur site.
It seems like some оf the text in your content are running off
tһe screen. Can someone else please provide feedback and
let me қnow if this іs һappening to them tоo?
This may Ьe a problem with my browser because I’ve had this happen before.
Kudos
It’s simple to crack slotxoth. There’s no need to play pornhup online slots. the most easily broken It can be broken without having to pornhup. You must slotxoth, register, gamble, and play. Certainly not a setback.pg slot
Play pg slot and learn new tricks. A Beginner’s Guide to Slot Games Each slot in pg slot games is a fast moving and safe game that anyone can win. Rewards can be generated for playing video games.
Slot pg, direct website, not through agents, easy to break, all games are included in this website slot, every game Slot games are the easiest to break on the web, slots, easy access, free spins, no minimum spin, many promotions.
ambbetwallet slot game that can be accessed immediately and can transfer money into the system to withdraw very easily. Just know how to use true wallet. That’s all.
Hurrah! After all I got a weblog from where I be able
to actually obtain helpful data concerning my study and knowledge.