The Importance Of The Foreign Exchange Market

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Introduction When one nation wants to sell or buy from another nation, they will need to know how much that it is going to cost. The problem is that not every country is the same when it comes currency wise so that is why we have the currency exchange rate. The currency exchange is the rate that two country’s currencies at which that will exchange for one another. When comes to the exchanges of the different currencies, it takes place in the foreign exchange market.
Foreign Exchange Market When you want to sell, buy and exchange currency this is the place. According to Investopedia. (2008) the market consists of “banks, commercial companies, central banks, investment management firms, hedge funds, and retail forex brokers and investors.” …show more content…

The Foreign Exchange Market deals with that task and it has to consider so many factors to be able to determine the exchange rates. The current exchange rate is floating, which means that it is up and down because of multiple reason or they can be fixed with another currency.
Floating. With floating rates, they are influenced by supply and demand. Basically decides how much demand for the currency in relation of supply will regulate the currency’s market price in repect to another currency. There are loads of ways for the exchange rate between two countries to change according to MacEachern, (2008),” few of the most popular include: interest rate decisions, unemployment rates, inflation reports, gross domestic product numbers and manufacturing information.”
Fixed. A few countries can commit oneself to use a fixed exchange rate. The rate is nurtured by the government. To help the rates to be stable as possible, the country holds extensive amounts of currency in reserves. The reason behind this is to keep the currency fixed in order regulate adjustments in supply and …show more content…

“In the 1930s, the U.S. set the value of the dollar at a single, unchanging level:1 ounce of gold was worth $35.” (Grabianowski, 2004) A lot of other countries after World War ll, started to base the value of what their currency around the dollar. They already knew what the dollar was going in relation to gold. Lets say if a currency are worth three times as much gold then the dollar. You can figure that it is worth three dollars. After many years, the dollar was hit by inflation and they couldn’t keep up. According to Grabianowski (2004),” the U.S. could no longer pretend that the dollar was worth as much as it had been, so the value was officially reduced so that 1 ounce of gold was now worth $70.” As you look at that the conversion was 1 ounce for 35$ now it is 70$. The value of the dollar was cut in half. In 1971, the U.S went off the gold standard and today “the U.S. dollar and the euro account for approximately 50 percent of all currency exchange transactions in the world.”
(Grabianowski, 2004) that means most of what we exchange today are those two currencies. If you go online most of the exchange rates are represented in U.S

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