Currency Exchange Rates

Along with the stock and other equity markets, the global currency markets form one of the most vibrant and fast-paced trading disciplines out there. Fortunes are made, and occasionally lost, in a flash of a second, with traders generating massive profits and equally massive losses based on the smallest changes in a currency’s value, a country’s economy, or a change in trade balances.

It’s a fast-paced world, and it’s one that anyone can jump into. But unlike stocks, which are based on the value of the companies that they’re issued in, or commodities contracts, which are valued by the commodities they’re linked to, currencies aren’t the type of trade that can be predicted. There’s not a real advantage to having additional information, since the currency itself is too large to manipulate.

Again, unlike stocks – which are often manipulated, particularly with smaller ‘penny’ stocks and pump-and-dump style stock scams – it’s very difficult to have an information advantage when it’s currencies you’re trading. You can certainly be in the know, following exports and other factors in detail, but it’s very tough to know exactly when a currency is going to shoot up, or drop down.

In this guide, however, we’ll be looking at the factors that influence and effect currency exchange rates. From exports and imports all the way to powerful domestic markets, we’ll look at economic factors that influence currency exchange rates. We’ll also look at pegged and floating currencies, and the ways in which these different currencies can change value on the larger forex markets.

At the heart of currency exchange rates are two different systems. The first is the ‘floating’ currency – a form of currency that’s traded on the open market, with its value determined by market demand. It’s a simple form of currency valuation that’s used by many of the world’s largest currencies, such as the United States dollar, the Euro, the Great Britain pound, and the Australian dollar.

For the most part, floating currencies are primarily used by countries with a strong economy – the type of economy that’s unlikely to rapidly expand or decline. Because of their stronger economies, these type of countries can afford to have a currency that changes based on demand for their goods around the world. Generally speaking, this produces much more efficient macroeconomic results.

On the other hand, there’s the ‘pegged currency’, occasionally also known as a ‘fixed’ currency. A pegged currency has its value tied to that of another country. For example, the Chinese yuan has a value peg based on the United States dollar. This means that its value will stay constant against an American dollar, making import and export transactions simple for the two major markets.

The advantages of a pegged currency are obvious – it’s much more simple to calculate trades, and generally less volatile in its changes of value. China’s currency is pegged at a relatively low level, which encourages countries such as the United States, and the large Eurozone market, to import a range of products from their suppliers. This has resulted in strong exports from Chinese regions.

There are downsides to this type of currency. While it encourages outside markets to purchase a range of domestic goods, it also requires that the country’s government hold significant reserves, which are used to counter natural changes in the currency’s value. For example, an increase in the value of the currency would require the central bank to spend money equal to its value.

This has produced numerous economic issues around the world, particularly when countries that once used a pegged system transitioned over to a floating exchange rate. In the face of a booming economy during the 1990s and a pegged currency system, Thailand’s government was spending its foreign cash reserves in an effort to keep the baht’s value constant and encourage investment.

However, once cash reserves ran out, the government was forced to float the currency, dropping a great deal of its value and pushing many import and export-based companies in the country towards bankruptcy. Similar situations have occurred in Malaysia, which experienced its own crisis during a period of currency change, and other countries, many of which are located in East Asia.

There are other currency situations, all of which can have a positive of negative effect on exchange rates. These include single currencies such as the Euro, which replaced sixteen other currencies as a primary European currency. By using a single currency for its trade, European nations have almost completely cut out the effects of inter-Europe fluctuations, trade issues, and other volatility.

There are various ways to check the currency exchange rates, and even more ways to exchange your current currency for another. A variety of online currency exchange services exist, all of which give users a look into the value of other world currencies. Likewise, it’s simple to check the value of any currency offline at a bank or exchange trader, albeit with a small commission typically attached.

While the world of currencies – and in fact, the world of currency trading – can seem complex, it’s actually fairly simple to understand. However, as we’ve already discussed, it’s very different type of investment from stocks and other exchanges. Unpredictable, large and largely uncontrollable, it’s a battle where the winner isn’t the most connected, but the most knowledgeable and educated.