Forex Market And Exchange Rates

Forex Market And Exchange Rates

Forex Market And Exchange Rates

What Is Forex Market?

The forex market is a place where people can buy, sell, exchange, and speculate on different currencies. Banks, commercial companies, central banks, investment management firms, hedge funds, and retail forex brokers and investors make up the forex market. The currency market is the largest financial market, with daily transactions exceeding $5 trillion, more than the futures and equity markets combined.
Currency was pegged to precious metals like gold and silver until World War I. However, after WWII, the system collapsed and was replaced by the Bretton Woods agreement. As a result of this agreement, three international organisations were formed to facilitate global economic activity. The International Monetary Fund (IMF), the General Agreement on Tariffs and Trade (GATT), and the International Bank for Reconstruction and Development were the organisations in question (IBRD). The new system also replaced gold as the international currency's peg with the US dollar. The US government has promised to back up dollar supplies with gold reserves of equal value.
When US President Richard Nixon announced a "temporary" suspension of the dollar's convertibility into gold in 1971, the Bretton Woods system became obsolete. Currencies are now free to choose their own peg, with supply and demand in international markets determining their value. Banks, forex dealers, commercial companies, central banks, investment management firms, hedge funds, retail forex dealers, and investors make up the foreign exchange markets.

Types of Exchange Rate And Currency Movements

An exchange rate between two currencies (also known as a foreign-exchange rate, forex rate, or rate) is the rate at which one currency is exchanged for another in finance. It is also known as the value of a country's currency in terms of another country's currency. The number of units of a local currency required to purchase one unit of an internationally recognised standard currency, usually the US Dollar, is referred to as the exchange rate. The exchange rate regime describes how a government manages its currency in relation to other currencies and the foreign exchange market. The fixed rate, floating rate, and managed rate are the three main types of exchange rate systems.

1.    Fixed Exchange Rate

A fixed exchange rate, also known as a pegged exchange rate, is an exchange rate regime in which the value of a currency is pegged to the value of another single currency, a basket of currencies, or another measure of value, such as gold. A fixed exchange rate system's goal is to keep the value of a currency within a narrow range.
Few economists believe fixed rates give exporters and importers more certainty. Fixed rates also assist the government in maintaining low inflation, which helps to keep interest rates low and stimulate trade and investment in the long run. China's fixed exchange rate is well-known. It was one of the few countries that could impose a fixed rate by making trading its currency at any other rate illegal.
Forex Market And Exchange Rates

2.    Floating Exchange Rate

A floating exchange rate, also known as a fluctuating exchange rate, is an exchange rate regime in which the value of a currency is allowed to fluctuate freely according to the foreign exchange market. The exchange rate in a floating exchange rate is determined by the market forces of demand and supply. It's also known as the freely floating exchange rate or market exchange rate.
Floating currency is a currency that uses a floating exchange rate. A floating currency, such as the dollar, is an example. Floating exchange rates, according to many economists, are the best possible exchange rate regime because they automatically adjust to economic conditions. These regimes allow a country to mitigate the effects of shocks and foreign business cycles, as well as avoid a balance of payments crisis. As a result of their dynamism, they also generate unpredictability.

3.    Managed Exchange Rate

In most cases, the central bank will set a range within which the value of its currency can freely fluctuate. If the currency's value falls below the range's floor or rises above the range's ceiling, the central bank intervenes to bring it back into range. A managed float regime is a cross between fixed and floating. A managed float captures the benefits of floating regimes while allowing central banks to intervene and reduce the risk of negative consequences from the radical currency fluctuations that are common in floating regimes.

Dirty Floatation

Managed float regimes, also known as dirty floats, are where exchange rates fluctuate from day to day and central banks buy and sell currencies to try to influence their countries' exchange rates. Since central banks and governments intervene to influence the value of their currencies, almost all currencies are managed. As a result, if a country claims to have a floating currency, it is almost certainly a managed float.

Any suggestions or correction in this article - please click here ([email protected])

Related Posts: