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BASICS OF CURRENCY EXCHANGE

 

What determines if a currency rate goes up or down?

 

Currency rates go up or down depending on what people think that currency is worth. This may surprise you. It’s an important point because it means that it takes more than computers and software to know how a currency is likely to behave in the future. This is one of the reasons that Forex trading is a real, revenue-generating opportunity for so many people.

 

Of course, there may be an impact from the economic policies of different governments or central banks. A country may deliberately try to influence the exchange rate of its currency either upwards or downwards. This in turn is information that people use to form an opinion about the currency in general.

 

Where can you buy or sell your currencies?

 

In the first place, currencies are made available by “market makers”. These market makers may be brokers or banks, and they offer currencies at a “bid” price (if they buy from you) and a “ask” price (if they sell to you). They deliberately keep their bid price lower than their ask price, so that they will always make a profit. You make your profit by buying sufficiently low and then waiting for the exchange rate to change in your favor to then sell back to the market maker. That way you can both make a profit.

 

When does the exchange rate change?

 

As an example, let’s use one of the most principal exchange rates in Forex today is the Euro to US Dollar rate, that you’ll also see written as EUR/USD. Factors that affect the exchange rate include:

 

  • The difference in the real interest rates set by the US Federal Reserve and the European Central Bank. A higher interest rate for one of the currencies is often interpreted by traders as a positive sign for the economy concerned, and the exchange rate for that currency then goes up. In other words, it becomes more expensive to buy and gets you a better price if you have some of that currency to sell.

  • Relative prices in the traded and non-traded goods sectors. Higher prices in one currency suggests to traders that the economy concerned is doing well, and they tend to value that currency more as a result.

  • The real oil price. When oil prices go up, many traders see this as a negative factor for the American economy (because the USA is so dependent on oil imports) and the US Dollar typically goes down.

 

Note that at this level, currency rates are still being decided by what people, and traders in particular, think about the value of one or other of the currencies.