People who are in Forex trading for years might not be in need of read through, but this piece makes a must-read for those who are starting to trade online. Rate of exchange or exchange rate is the value of a particular currency in relation to another. For instance, at this date, one Euro equals to 1.30 US dollar. This means that you will receive 1.30 US dollar per unit, if you exchange the European to US currency. The rate exchange is also referred to by the traders as Forex rate.
Forex rates are generally of two kinds, fixed and floating. The first one is touted by the central bank of the country you belong to. It is fixed in connection with three chief currencies that the foreign trade of the nation transacts in. The fixed rate of exchange, also referred to as pegged rate, fluctuates with the rates of the other currencies in the market, with the bank taking the entire responsibility of the value. Now, fixed rate exchange has multiple advantages, one of them being the import export cost of the company remaining static, and ergo, stable. The fixed rate insures the stability of the economy of a nation, in a way making it change-proof to the changing scenario in the international market.
Floating rate is the second kind of exchange rate that changes with the influences made by the market drivers. This rate of exchange is heavily reliant on the demand and supply of the market that determine their value. However, this exchange rate is equally dependant on the governmental intervention or that of the Central bank of a nation. Directly linked with the import rate of the country, the floating rate exchange improves when the country’s import rate increases.
A beneficial aspect of floating rate is that the rates adjust automatically to the demand and supply ratio in the market. But, on a second thought, the floating rate exchange is the reason why inflation takes place leading to an overall crisis throughout. Secondly, the rates are never constant and are changing every minute making trading with them a challenge, unless you are updated. This is precisely the reason why managed floating rate of exchange has been created to put a stop to the free movement of the rates.
Traders should be aware of the factors that are contributory to the changing rates of exchange in this sphere. If you are the resident of a country that is economically strong, financial stability is automatically ensured. Otherwise, up and down movement of rates are too likely. The central bank policies are also affecting factors as they are the ones that decide on the value of the currency of a particular country. The frequency and amount of foreign investment in the national and international market leverages the value of currencies. Other factors that affect the rates at foreign exchange are the trade and equity flow of the country.