Information AboutExchange Rate |
| CATEGORIES ABOUT EXCHANGE RATE | |
| currency | |
| foreign exchange market | |
| international trade | |
| international economics | |
| macroeconomics | |
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In Finance , the exchange rate (also known as the '''foreign-exchange rate''', '''forex rate''' or '''FX rate''') between two Currencies specifies how much one currency is worth in terms of the other. For example an exchange rate of 120 Japanese Yen (JPY, ¥) to the United States Dollar (USD, $) means that JPY 120 is worth the same as USD 1. The Foreign Exchange Market is one of the largest markets in the world. By some estimates, about USD 2 trillion worth of currency changes hands every day. The spot exchange rate refers to the current exchange rate. The '''forward exchange rate''' refers to an expected future exchange rate. QUOTATIONS An exchange rate quotation is given by stating the number of units of a ''price currency'' that can be bought in terms of 1 ''unit currency''. For example, in a quotation that says the EUR -USD exchange rate is 1.2 USD per EUR, the price currency is USD and the unit currency is EUR. Quotes using a country's home currency as the ''price currency'' (e.g., £0.574744 = $1 in the UK) are known as ''direct quotation'' or ''price quotation'' (from that country's perspective) ( {Link without Title} ) and are used by most countries. Quotes using a country's home currency as the ''unit currency'' (e.g., $1.73990 = £1 in the UK) are known as ''indirect quotation'' or ''quantity quotation'' and are used in British newspapers and are also common in Australia , New Zealand and Canada .
Note that, using direct quotation, if a unit currency is strengthening (i.e., Appreciating , or becoming more valuable) then the exchange rate number increases. Conversely if the price currency is strengthening, the exchange rate number decreases and the unit currency is Depreciating . When looking at a Currency Pair such as EUR/USD, many times the first component (EUR in this case) will be called the base currency. The second is called the counter currency. FREE OR PEGGED See Also: Exchange rate regime If a currency is free-floating, its exchange rate is allowed to vary against that of other currencies. Exchange rates for such currencies are likely to change almost constantly as quoted on Financial Markets , mainly by Bank s, around the world. If the value of the currency is " Pegged " its value is maintained by the government in question at a fixed rate relative to the other currency. For example, in 1983 the Hong Kong Dollar was linked to the United States Dollar . NOMINAL AND REAL EXCHANGE RATES
FLUCTUATIONS IN EXCHANGE RATES A market based exchange rate will change whenever the values of either of the two component currencies change. A currency will tend to become more valuable whenever demand for it is greater than the available supply. It will become less valuable whenever demand is less than available supply (this does not mean people no longer want money, it just means they prefer holding their wealth in some other form, possibly another currency). Increased demand for a currency is due to either an increased transaction demand for money, or an increased speculative demand for money. The transaction demand for money is highly correlated to the country's level of business activity, gross domestic product (GDP), and employment levels. The more people there are out of work, the less the public as a whole will spend on goods and services. Central Bank s typically have little difficulty adjusting the available money supply to accommodate changes in the demand for money due to business transactions. The speculative demand for money is much harder for a central bank to accommodate but they try to do this by adjusting Interest Rate s. An investor may choose to buy a currency if the return (that is the interest rate) is high enough. The higher a country's interest rates, the greater the demand for that currency. It has been argued that currency speculation can undermine real economic growth, in particular since large currency speculators may deliberately create downward pressure on a currency in order to force that central bank to sell their currency to keep it stable (once this happens, the speculator can buy the currency back from the bank at a lower price, close out their position, and thereby take a profit). In choosing what type of asset to hold, people are also concerned that the asset will retain its value in the future. Most people will not be interested in a currency if they think it will devalue. A currency will tend to lose value, relative to other currencies, if the country's level of inflation is relatively higher, if the country's level of output is expected to decline, or if a country is troubled by political uncertainty. For example, when Russia n President Vladimir Putin dismissed his Government on February 24, 2004, the price of the Ruble dropped. When China announced plans for its first manned space mission, synthetic futures on Chinese yuan jumped (since China's currency is officially pegged, synthetic markets have emerged that can behave as if the yuan was floating). Like the stock exchange, money can be made or lost on the represents current exchange rates, whereas options are Derivatives of exchange rates. FOREIGN EXCHANGE MARKETS See Also: Foreign exchange market The , followed by New York and Tokyo . SEE ALSO
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