Foreign Exchange Trading

by ABC editor

Foreign Exchange

Foreign exchange or forex rates determine what you get when you swap one currency for another. Tourists going abroad need foreign exchange, an import firm has to keep up with currency conversion rates to pay for purchases overseas, and multinationals need to keep tabs on multi-currency operations.

Currencies are actively traded in the fast-paced and hugely volatile foreign exchange markets whose participants are largely institutional investors such as hedge funds, multinational and financial companies such as banks.

While most currencies are freely convertible into foreign exchange, there are some controlled currencies, the Chinese yuan or renminbi, as it is alternatively known, being one of them.

A foreign exchange rate reflects the health of the underlying economy which is depicted through such statistics as its gross domestic growth rate, trade balance and budget surplus or deficit and money supply in circulation.

Foreign exchange rates are also linked to a country�s interest rates and the greater the potential of an impending rise in interest rates, the more sought after is the currency. This comes about as large funds seek higher returns through higher interest rates earned on the treasury securities issued by the underlying country.

The US dollar for example has been undergoing pressure in the foreign exchange markets due to global concerns over the massive and still growing budget deficit, a large trade deficit and persistent economic crisis. While it was once the currency of choice for international trade, many countries especially the oil-producers, which earn revenues in US dollars, are asking that other currencies including the yen and the euro be used to pay for oil exports.

Foreign exchange markets trade in mind-boggling volumes daily. Latest 2007 figures by the Bank of International Settlements show that as much as US$3.2 trillion changes hands daily! The average investor can now gain exposure to these markets through currency exchange traded funds (ETFs) that are created to track the movement�s of the world� s currencies against the US dollar.

Photo Credit: bowbrick

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