International Currency Exchange Rates

The foreign exchange (forex) market is a global, over-the-counter market for buying and selling currencies. There are 165 currencies available in the world today and all of them are traded in the forex market to a greater or lesser degree. Changes in the relative value of different currencies are communicated to all participants by exchange rates. An exchange rate is what one currency is worth in terms of another currency. For instance, comparing the U.S. dollar to the Japanese yen, the exchange rate is currently ¥76.80 as of October 19, 2011. One dollar is worth that amount of yen in Japan. Exchange rates are the natural result of every currency being priced in terms of every other currency simultaneously.

An exchange rate is quoted in pairs. Represented on a computer screen or a trading desk, the exchange rate looks like this: USD/JPY, which means the dollar is being sold to purchase yen. There is also a corresponding currency pair in reverse: JPY/USD. “JPY” and “USD” are the international forex symbols for the Japanese yen and the U.S. dollar. Exchange rates are the pricing mechanism in forex. Market participants use them when they buy and sell currencies. Participants include multinational corporations, international financial institutions, foreign governments, central banks and tourists.

Central banks use the forex market to support the relative values of their own currencies against other currencies, such as the ones of their countries’ trading partners. Foreign governments use exchange rates as part of diplomatic or economic strategies. Multinational corporations use them to gauge relative profitability and to translate profits made in one currency into another currency. Tourists use exchange rates to acquire spending money that will be accepted in their intended destination. International financial institutions like banks use exchange rates both to make profits and to carry out the needs of their customers across the globe.

Exchange rates have an internal hierarchy based on the preeminence and use of certain currencies over others. Foremost among all currencies is the U.S. dollar, which is the world’s reserve currency. This means other central banks, foreign governments and financial institutions use the dollar to settle international debts. Commodities like gold and oil are priced in U.S. dollars. Holding dollars as foreign exchange reserves can help countries pay their debts and even make investments in the U.S. International commerce depends on exchange rates to communicate accurate information.

Due to the global nature of the forex market, it never stops trading except for a brief period every Sunday. The forex week begins Sunday afternoon in Australia and ends on Saturday afternoon in New York. The major forex centers are New York, London and Tokyo, with minor centers in Sydney and Hong Kong. Exchange rates are priced by innumerable traders and speculators combined with the major market participants. Price discovery in the forex market is an instantaneous affair.

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