How To Analyze The Behavior Of The Foreign Exchange Market

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We all know that every country has its own local currency. And all imported goods are paid in the local currency. For example if the USA company brings goods to United Kingdom, so the payment will be done in GBP. Only in two cases being paid with GBP is good for the US company. Firstly if GBP is quickly and easily can be exchanged to USD. As the company is located in USA, it will have to pay US dollars for production of goods. Secondly, the exchange of GBP to USD should provide the company with income in USD, not GBP. Hence it is clear that the exchange of national currencies is not a technical problem but a necessary condition of international trade. It is true that international trade transactions are possible on the basis of barter, that is, exchange of goods or products. However, this form is usually used in the absence of currency reserves and is extremely inefficient.

For a long time, currency exchange was done by fixed exchange rates, when the ratio of national currencies was established and maintained by the government of the countries. Currently in the most countries, the exchange of national currencies is on floating exchange rates, where the price is spontaneous and is composed under the influence of supply and demand of the foreign exchange markets. The rate of the local currency depends on the currencies’ balance in foreign exchange. If during a trading day one million US dollars confront a hundred million GBP, so one USD will cost 100 GBP and vise versa. Thus the greater the demand for a national currency, the higher is the exchange rate.

Sometimes it happens when the government wishes to support the national currency or a foreign currency. In order to achieve it they do an intervention. For example in order to support GBP, the government of UK should release more USD to the currency market of UK in order to increase the supply of US dollars. But this action is expensive and therefore is done rarely.

Let’s clarify what determines a particular ratio of the national currencies. There are a lot of reasons of course, including political ones, but the main thing is that the demand for the currency of the country reflects foreign demand for goods of this country. If foreign buyers are not interested in the goods of a specific country, it weakens the national currency as there is less interest in it. Thus production is one of the most important factors that influence the national currency.

A drop of the exchange rate of national currency is called devaluation and rising is called revaluation. Is it good when the exchange rate of national currency grows? Is it bad when it drops? Since the ratio of currency rates not only reflects but also affects the export-import operations of the country, the devaluation and revaluation of the national currency have different consequences. When the national currency rate goes down, it leads to the growth of export. When the national currency rate rises, it makes a good opportunity for import. Both import and export are very important for any country. Thus adjusting the exchange rate of national currency, the government can directly affect the volume of export and import.

About the Author

Daniel Shaw is an experienced Forex trader and a webmaster. His site Trading Platforms Singapore will teach you different trading strategies and provide you with the latest updates about Singapore online brokerage.

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