We have been hearing about the exchange rate in recent times, especially in this part of the world, due to the consistent change in the forex exchange market. Despite this, very few of us know what exchange rates are and what they are all about.
This article sheds more light on what an exchange rate is, what influences it, why it is important to know about exchange rates, what FOREX is, and what types of currency exchange rates are there? If you are interested in all of this, then I urge you to pay a little more attention..
How do exchange rates work?
The price of one currency stated in terms of another currency or set of currencies is known as the exchange rate. The exchange rate is a significant economic determinant for both small and open economies that actively engage in international commerce.
Exchange rates are influenced by a variety of factors, such as:
- Data and economic activities
- Domestic product, or GDP
- Market rates of interest
- Rates of unemployment
- Politically turbulent or unpredictable times
The decisions made by people, corporations, and, the government, as well as all the factors, stated above, cause changes in the currency exchange rate. This has an impact on the balance of payments, inflation, and economic activity altogether.
What is FOREX (Foreign exchange rate)?
The global market for exchanging one country’s currency for another is known as the foreign exchange market, or Forex or FX. With billions of dollars passing hands every day, the currency market is the largest and most liquid market in the whole globe.
To clarify, when you buy a product on Amazon in euros and pay in Nigeria in either USD or Naira, you have made a foreign exchange. This also applies to international students from Nigeria, who pay their school fees online, they have also made a foreign exchange.
The major foreign exchange trading that occurs every day is usually related to or slightly distant from the experiences shared above. There are some people whose specialization is in foreign exchange trading. This requires a little bit of technicality and financial smarts, but it is one of the ways people make money globally.
What types of currency rates are there?
Around the world, there are two types of currency rates to be aware of: flexible and fixed exchange rates. From their name, you can simply say one is a currency exchange rate that can be altered and the other is a constant exchange rate.
- Flexible exchange rate: The foreign exchange market, sometimes known as forex, controls the majority of currency exchange rates. These exchange rates are referred to as flexible rates. Since this is the case, currency rates vary often. This increases the price of imported items and can boost the economy as buyers move to locally produced goods and services, creating jobs that aid in market correction. A flexible exchange rate is constantly shifting since this cycle occurs often.
- Fixed exchange rate: A fixed exchange rate is a system used by a government or central bank that links the value of the nation’s official currency to the currency of another nation or the price of gold. A fixed exchange rate system’s goal is to maintain a currency’s value within a specific range.
Why is it important to know about exchange rates?
It is important to know about exchange rates for a myriad of reasons. The most important of them all is because of how it impacts every area of our lives as individuals, international students, business owners, employees, employers, Forex traders, etc.
As a student, you need to be aware of the exchange rate before leaving or while you are travelling so you can calculate how much your money is worth abroad. If a dollar isn’t worth a dollar when you’re travelling, you may adjust your budget and be aware of how much you’re actually spending.
Travelling abroad almost certainly necessitates exchanging your home currency for that of the destination. The amount of money you’ll receive in exchange for a specific quantity of the local currency is based on rates that are set worldwide.
The currency exchange rate is one of the most significant drivers of a country’s relative degree of economic health, along with variables like interest rates and inflation. Every free market economy in the world depends on commerce, which is significantly influenced by exchange rates. Therefore, it cannot and should not be ignored.