Forex; The Value Of A Dollar
October 7, 2008
Forex, or foreign exchange, is the trading of one nation’s currency for that of another. The Forex market is influenced by the supply and the demand for goods and services provided by each country in comparison to the supply and demand of goods or services provided in other countries.
Having established that forex is a trade of one countryas currency for that of another countryas, it is essential to know that the world currencies do not have a fixed exchange rate and are always fluctuating and the amount of the other countryas currency that maybe receivable on a specific amount of currency for say a base currency such as the Dollar, establishes the forex or foreign exchange rate. An e.g. would be 2 Dollars being equal to 1 Sterling.
The frequency of exchange, direction of currency movement, as well as other real-time factors impact the values at which various currencies are exchanged. The majority of trading is accomplished via foreign exchange brokers. These transactions are completed continuously throughout the world.
The question that arises now is that why is there a need for foreign exchange? The main reason is international trade. We live in a world where there are many countries and each is unique in geography, natural resources and human capital. No single country is capable of producing domestically all the essentials to satisfy the needs of its citizens and certainly not at the lowest possible cost.
The solution then is international trade and if for e.g. USA imports microchips from Japan, then the payment that will be made to the firm in Japan will be in Japanas local currency and not in USAas. The purchaser will need to have Dollars exchanged for Yens to be able to carry out the transaction.
The goal of an investor in Forex trading is to make a profit from the said transactions. Some investors will rotate currency on order to obtain higher exchange rates. In this example, an investor would trade currency and then hold it until the exchange rate for that currency grows, then exchange it again, thus making a profit.
Some of the participants in this market are simply seeking to exchange a foreign currency for their own, like multinational corporations which must pay wages and other expenses in different nations than they sell products in. However, a large part of the market is made up of currency traders, who speculate on movements in exchange rates, much like others would speculate on movements of stock prices. Currency traders try to take advantage of even small fluctuations in exchange rates.
Foreign exchange is a convenient market to participate in, with many traders trading in the off hours/days, and activities occuring 24/7. Since there is no actual center of operations like that of the stock market, traders are able to fit forex activity into their busy lifestyles.
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