You may not have realized as of yet, but the Foreign Exchange Market is now the largest financial market in the world today. On a daily basis more than $1 trillion is being traded every day, so the potential for your to earn an additional income from it is very good. However if you really want to see a good return understanding more about what Forex Rates are is important.
In this article we will aim to provide you with further information with regards to Forex rates so you understand them a little more, including why some may fluctuate and others don’t.
So what are Forex rates?
Foreign Exchange rates are the rates at which one currency say the Australian Dollar (AUD) can be exchanged for another, say the British Pound (GBP). What it really is in fact is the value of the other country’s currency (GBP) against that of your own (AUD).
Should you be traveling to another country, then of course you will need to purchase some of their currency. As with the price of any other asset FX rates are the price at which you will be able to buy the other currency for. For example if you were travelling to the UK the rate for the 1 AUD is 0.6185 GBP. What in turn this would mean is that for every AUD you would be able to buy 0.6185 GBP.
Yet in theory identical assets should in fact be selling for the same price in the different countries, as the Forex rates must ensure that the value of say the AUD against the GBP should be maintained. However there are two ways in which the price of one currency can be determined against another. Below we take a look at what these two ways are.
1. Fixed Forex Rates
Fixed or pegged Forex rates are those that the country’s central bank will set and then maintain as its official one. The price set is decided upon by determining it against another major currency in the world (normally the US Dollar). However in order to then maintain the local FX rates the country’s central bank will buy and sell its own currency on the Forex market in return for the currency that it is pegged to.
2. Floating Forex Rates
Unlike the above floating Foreign Exchange rates are actually determined by the private market through supply and demand. Often these particular rates are termed as being “self correcting” due to the fact that any difference between supply and demand will be corrected automatically in the market.
Therefore if demand for say the AUD is low then its value will start to decrease. In turn this makes any goods imported into the country much more expensive, but will cause demand for local services and goods to be increased. As a result of this more jobs may be created and in turn correction of the Forex rates will automatically take place. What this then results in of course is that these particular Forex rates are constantly changing and could lead to you seeing a healthy return in you were to invest in this market.