Importance Of Foreign Exchange

What is Foreign Exchange?

Foreign exchange identifies the process of converting domestic currency into international banknotes at particular exchange rates. Foreign exchange rates affect international trade, capital flows and political sentiment.

 Foreign exchange, or Forex, is the conversion of one country's currency into that of another. The value of a country’s currency is set according to factors of supply and demand , if lots of people want to buy one type of currency then its value goes up, which is called appreciating, and if more people are trying to sell it than the value goes down, called depreciating. The value of a country’s currency may be fixed by the country’s government (normally used by smaller countries, who want more

A high value currency is a sign that a country has a good economy, as it shows that people want to invest in the country by buying its currency. If an economy is in trouble people will usually try and sell its currency, which pushes its value down.

However, if a currency’s value is too high it can affect a country’s exports, since products made there become too expensive for people to buy abroad, which can damage the economy. The Forex market mainly exists because of the need to ease or facilitate currency exchange. There is a need to exchange currencies because one country’s currency is not accepted in another. Currencies are needed everywhere to facilitate trade of goods and services. The Forex market works just like the other financial markets. Currencies are sold and bought at the current rate.Since the U.S. dollar is the currency that dominates in financial markets, exchange rates are expressed mostly in US

Furthermore, the additional costs that are incurred to clean up and rebuild after a disaster takes away from government and private spending that could have been used towards economically advantageous ventures, rather than towards patching up a break in the value chain from damages in infrastructure. All in all, a natural disaster will almost surely hit an economy's currency hard.

The Bottom Line

These are just a few events that can have a profound effect on the currency markets. As you can see, the key points to take from this discussion is that much of a currency's value is derived from the economic strength of the nation, and any unforeseen uncertainty to predictable future forecasts of economic outputs will typically not work in a currency's favor. (Staff,2011)

The rate of inflation in a country can have a major impact on the value of its currency and the rates of foreign exchange it has with the currencies of other nations. However, inflation is just one factor among many that combine to influence a country's exchange