Currency Exchange Rates

Currency Exchange Rates

Factors Influencing Currency Exchange Rates - World & Money Foreign Exchange Mechanics

Currency Exchange Rates

Currency exchange rates are an important monetary unity of measure that indicates the relative value of one currency against another. Typically, world currency exchange rates are quoted on the basis of a base rate. For example, one unit of the Australian dollar may be worth 91 cents expressed in US dollar terms. These rates are offered by international currency conversion brokers or money converters and can vary depending on where you attempt to change your money. The current currency exchange rate offered reflects market forces of supply and demand as determined by the fundamental factors that influence the market.

Foreign currency trading takes places in what is essentially an over the counter market where brokers and dealers negotiate with each other. There is no central exchange per se and most of the trading takes place on the interbank market via the large international banks that quote prices on the basis of bid/ask spreads. The prices offered for retail transactions do not necessarily reflects these spreads. Retail customers are subject to bank mark ups. If you have ever tried to conduct money currency exchange you would notice that currency exchange rates can vary between exchangers. Usually, you get better rates at the banks themselves as the rates charged by money converters and exchange booths such as American Express reflect the base rates and any markup the provider is adding to these rates.

Currency Exchange Rates

There are a number of participants comprising the currency exchange markets. The banks comprise the largest forces and consist of a combination of transactions to facilitate business between multinational corporations and proprietary traders who are predominantly speculative or hedging bank currency exposure. International central banks are also active in the markets. Retail traders comprise a very small volume of currency transactions.

The current currency exchange rates are influenced by the economic fundamentals that affect the country. Current Account Deficits, interest rate differentials, growth rates, employment and business activity all affect the demand and supply of the currency. When demand for resources is high, this puts upward pressure on commodity producing countries such as Australia and Canada. High interest rates in one country can also affect a countries currency exchange rates because it encourages capital inflow from international speculators who borrow in one country at a lower rate and seek to exploit the difference between interest rates. This is called the carry trade and has been facilitated by the Yen in recent years due to the low interest rates on offer in Japan. The US, who have enjoyed a strong currency exchange rate and the world's 'reserve currency status' for many years have had a distinct advantage over other countries due to the fact that crude oil is priced in US dollars. This has helped to keep the US rate artificially high.

If you are traveling and want to secure the best rate, it is best to carry currency in the major denominated currencies such as the US and Euro. Some countries do not readily carry foreign exchange for lesser known currencies and it can be difficult to do currency exchange conversions.

Resources | Contact Us | Privacy Policy | Disclaimer |