subject: Forex Rates: A Quick Guide To Currency Trading For Dummies [print this page] When you are traveling, you need to exchange the currency you have, to the local currency. However, if you are trading a dollar for a rupee, you don't get a dollar for a rupee. Exchanging a dollar means you will get about 45rupees in return. This same currency trading also takes place on an international level and is referred to as foreign exchange or forex and more than $2 trillion trades are carried out per day.
A Little History
Currency was initially backed by gold. The American dollar was also considered as the standard international currency. That meant that a single dollar was backed by a certain amount in gold and it could be traded as such. But as time passed, it became increasingly difficult to balance the cost of the dollar with gold. Nowadays, local economic conditions, inflation rates, import and export trading of a country, determine the cost of its currency and how it will trade against the dollar. The dollar still dominates international forex trading markets and all currency forex rates are usually expressed in relation to the dollar.
How Does The Foreign Exchange System Work?
Most countries determine the value of their currency through a floating or a pegged exchange rate system. A floating system sets the cost of the local currency according to local economic conditions. The pegged system is only indicated for developing countries who want to set the value of their currency during currency trading. The rate would not fluctuate day to day and the local currency was backed by American dollars.
Pegged systems of currency trading are very risky and there is a very good chance of people realizing that their currency is not worth as much as the dollar. This may lead to distress sales of the local currency leading to worthless currency and a complete collapse of the economy. To protect the foreign exchange rate or forex rates, counties now use a mixture of pegged and flexible exchange rates. Trading in the currencies starts first in the New Zealand Market and then continues across the globe. Supply and demand also determine the cost of the currency. Obviously, the higher the demand for a currency, the more the value of the trade and its value compared to the dollar. Currency trading does not stop on holidays and hundreds of currency trading centers are usually open all over the world.
This is just a simple guide to how forex rates work and how the market is set. If you would like to learn more or if you are interested in currency trading, a basic course in economics would be really helpful.
