Fx rates are used to determine how two currencies can be exchanged for one another based on their relative values. Different currencies are valued differently on the forex market. In order to trade one currency for another, you need to know how much of one you need to get the other. Currencies are traded in pairs so forex rates are used to represent the ratio of the values of two currencies in a given pair. The U.S. dollar is widely accepted as the standard currency for trading in the forex market and therefore forms part of many currency pairs. Currency pairs not including the U.S. dollar are commonly referred to as cross pairs and their exchange rates are known as cross rates.
Why forex traders are keen on fx rates
Currency values are not constant, but change depending on prevailing market conditions. This means that forex rates representing the different currency pairs also change as the currency values fluctuate against each other. The rates are given up to the fourth decimal point and the smallest movement is represented by a pip. When a currency rate gains several pips, it means that it is strengthening and traders can benefit from this. In order to make profits from forex trading, traders have top buy currencies when the prices are low and sell them when the values rise. This means that one is required to watch the markets keenly for these price movements.
Watching the currency values rise and fall and then trading is not enough. Forex traders need to know what causes forex rates to change and how these changes happen. The values of currencies in the forex market are determined by the economic performance of their respective countries. A strong, stable economy translates into a strong currency with high demand in the forex markets. Investors in the foreign exchange market will avoid buying the currency of a country with a weak, unstable or poorly performing economy.
Political factors affect the economic performance of a country. It is hard for a country that is politically unstable to have an economy that is performing well. Therefore, political factors will contribute to the rise and fall of forex rates. Periodic political events like elections are known to cause a significant impact in the markets. Political upheaval would cause the value of a country’s currency to fall very fast. Trades usually keep a keen eye on the political news coming from countries whose currencies they are trading.
Fx rates and the economy
In a stable political environment, the economy has chance to thrive. When this happens, unemployment rates go down and citizens of that country usually have increased purchasing power. This means there will be a high demand for consumer goods and the result will be rising inflation. High inflation rates are not necessarily good for a country so the central bank has to intervene at some point to curb the rising inflation.
High inflation means that a country’s currency starts to lose purchasing power and this makes its value decline in the forex markets. This will be reflected in the forex rates. The central bank can curb inflation by raising interest rates. This has several effects on the economy and currency of a country. First, high interest rates means that consumers in that country will lose their purchasing power as they will have less money to spend on consumer goods. However, foreign investors will be looking to invest in that country as they stand to make good returns. As a result, the currency of the country will be in high demand and its value will strengthen in the forex markets. Again, these changes will be reflected eventually in the fx rates.