Whether you work abroad, or make international transfers regularly to help educate your child abroad, you need to understand basic foreign exchange-rate information to maximise your money transfers abroad.
Although it is much easier to enable banks or services to send you their money, they may wind up losing huge sums of money to FX spreads or covert fees that are secretly charged to you by those organisations.
Therefore, a fundamental grasp of FX rates and how the market influences them is crucial. And if you believe it isn't your cup of tea to learn about the foreign currency, we are here to facilitate your understanding.
Foreign Exchange rate
Foreign exchange rate is the value of the currency of the nation compared to another nation typically referred to as the national currency and the foreign currency which is also referred to as the base and counter currency. These rates influence the Foreign exchange market as well as the local market.
When the exchange rate is 1.30, it would indicate a person would be required to purchase 1 US dollar for 1.30 Australian dollars. The first quoted currency is always one unit; the conversion rate shows the quantity of the second (AUD) currency to buy the first unit (USD).
Where is Foreign Exchange Market?
Contrary to stock markets where physical exchanges are centralised, the exchange market is an OTC market where trading takes place directly between two parties without an exchange participation. No centralised exchange market exists!
In an OTC market, players trade with one another using several communications modalities, including telephone, email and electronic proprietary messaging and trading systems. A best online trading account is the one with all advanced online features not the physical one.
The foreign-exchange market is by far the largest in the world in terms of its trading volume and its players include banks, international enterprises, central banks, investment management companies, hedge funds, retail market brokers and investors.
How rates are set?
The supply and demand of currencies determines the current FX rate. Banks worldwide purchase and sell multiple currencies to meet the demands of commerce or to exchange one currency of their clients.
The total of dollars sold by all banks and dollars bought by them all generates US dollars in supply and demand. Like in any market, the dollar will appreciate versus other currencies if demand for dollars is increasing.
When demand falls, the dollar depreciates from other currencies. The rates are determined by all banks who bid and offer currencies to each other all day.
It is vital to know what currency pairings are and what they mean before you start your first business.
- Currencies trading in pairs in the forex market constantly. There are two currencies involved when you convert US Dollars for euros, therefore the exchange always indicates the value of one currency vs the other. For example, the EUR/USD pricing allows you to know how many US$ it takes for a single euro to buy (EUR).
- For certain currency pairs, the forex market utilises symbols. The euro is EUR, USD, such that the euro/United States pair is EUR/USD. The US currency is USD. AUD (the Australian dollar), GBP (the UK's pound), CHF (the Swiss franc), CAD (the Canadian dollar), NZD (the New Zeland dollar), and JPY (the Japanese yen are widely traded currency symbols).