What is the foreign exchange market?
The foreign exchange market is global currency trading. The currencies are traded on both large and small scale. Some governments order a fixed exchange rate between currencies rather than allow the free market to set prices. Others use a floating exchange rate that depends on the foreign exchange market to achieve price balance. Many factors affect prices on the foreign exchange market, many of which are essentially unpredictable. Whether they get a foreign currency in advance or not, they are part of the global exchange market in currencies. On a larger scale, international banks and financial companies can trade in the foreign exchange market for income. If the institution can seize the currency before its value increases, it may blow out to a later currency conversion.
With a fixed exchange rate, however, the government determines the exchange rate. Many governments prefer fixed exchange rates because they can help bring economic stability. Before the euro currency was used, many European countries had agreements to link their currencies in an effort to stabilize the exchange ratey. They tried to prevent large fluctuations in exchange rates between countries that were considered to be instability and inflation. The Euro is effectively used to lock the exchange rates because it is of the same value in all Member States.
other nations, including the US, usually used a floating exchange rate. Because the floating exchange rate is determined by the foreign exchange market, it can change rapidly according to many different factors. Some argued that the foreign exchange market is very similar to perfect competition because it is largely unregulated.
Political stability is one of the factors that can affect prices on the foreign exchange market. When social unrest threatens to apply authority to the government, its monetary value may suffer. Foreign traders, whether small or large, will be reluctant to replace a more stable currency for less stable. Unstable countries tend to suffer from reduced economic production that offersHolders of their currency less opportunities to apply it. Reduced demand for less stable currencies directly causes to lose value on the foreign exchange market.
Economic conditions also affect exchange courses. For example, if traders suspect that the level of inflation will rise in a foreign country, they will be reluctant to buy their currency. Inflation reduces the purchasing power of the currency and thus reduces its demand. However, the growing gross domestic product (GDP) tends to increase the value of the currency. GDP is a measure of the overall power of the economy, so trust in its currency increases.