Foreign exchange or forex is the process of exchanging one currency for another. The foreign exchange market is an over-the-counter, global market for the buying and trading of various currencies. This market involves all aspects of purchasing, selling and trading currencies in current or determined exchange prices. Some of the major currencies in the forex market are the US dollar, the euro, the Japanese yen, the British pound, the Swiss franc and the Australian dollar. The key factor that determines the exchange rate in the foreign exchange market is the balance between supply and demand.
There are many factors influencing foreign exchange rate such as political and economic conditions of countries, and structural factors such as inflation and interest rates. The Forex market keeps a close eye on those factors influencing the foreign currency exchange rates. They use strategies to earn profit from the fluctuating rates. The foreign exchange market keeps an eye on commodity prices and other financial issues. There are a number of short-term Forex pips in the energy, raw materials and financial sector.
The Foreign exchange markets have become a significant source of income for many individuals. It can also be called as a great way of making money. The Foreign exchange markets are open round the clock and twenty-four hours per day. There are three types of foreign exchange markets namely forward, spot and spread.
The forward market participants include banks, brokers, corporate groups, institutional investors and traders who trade in large quantities. Borrowers are other foreign exchange rate traders who borrow funds to invest and repay them later. These transactions occur on a daily basis. Spot exchange rates are quoted by market participants on the same day and are quoted as a correction to existing market rates.
The Foreign exchange rate is determined by the supply and demand in the market, foreign exchange rate, inflation and other macroeconomic factors. Forex pips are indices of fluctuations in the foreign exchange rate. Foreign exchange rate plays a vital role in determining the value of a specific currency. Foreign exchange rate helps investors and traders to gauge the strength and flexibility of the US dollar against the major currencies. Besides, this market also reflects the state of international economic activity.
On the other hand, exchange rates also have an impact on the stability of the country's economy. Economic policies, external financing, balance of payments and interest rates all have a great say in the exchange rate. The central bank can intervene into the foreign exchange market if it feels that foreign currencies are being overvalued. For example, if there is a rise in the Supply of certain currency over the other, the central bank can opt to increase the foreign exchange rate in order to curb the appreciation of the currency against the other. However, a rise in the market costs may depreciate the currency, and this may result in a fall in the value of the national currency.
The role of financial institutions in the Foreign exchange markets has been a significant driver behind the evolution of Foreign currency Markets. In the early days, most of the transactions were executed through the banks and money lenders. Today, most of the trade and dealing of Foreign currency takes place on the internet platforms. Some of the largest financial institutions are also investing in the foreign exchange markets. Financial institutions like banks and mutual fund companies invest the money of their clients.
In order to trade in foreign exchange you need to understand the mechanism that governs foreign exchange rates. The Foreign exchange rate basically involves two parties who enter into a contract to buy or sell a specific currency with another party. These contracts take place at specific periods of time, for example daily, weekly or monthly. In addition, money market funds and high interest rate credit markets are also major players in Foreign exchange trading.