What are Money Exchange Rates?Thursday, November 26, 2009 7:10
Currency trading depends almost exclusively on money exchange rates and their relationship with various factors that drive economic activity over the long term. some strategies, like the carry trade do not derive their profits entirely from changes in currency quotes, but it’s impossible to imagine a forex strategy that is in any way independent of money exchange rates. In this article we’ll take a look at what money exchange rates are, and what creates them.
Money exchange rates are created by everyone
Money exchange rates are not created by governments and businesses alone, but by every person or entity who engages in some kind of cross-border economic activity, directly and indirectly. In fact, since currency traders decide money exchange rates on the basis of the economic strength of different nations, it’s fair to say that every single aspect of economic activity plays a role in defining the exchange rate equilibrium, and is therefore relevant for the creation and lifespan of forex market trends.
Money exchange rates describe the supply and demand equilibrium for a currency pair
Money exchange rates define the supply and demand balance for a currency pair. This supply and demand balance is not just created by trade flows, but also by international banking, mergers and acquisitions, government policies, and many other factors. It is important, therefore, to mention here that the actual supply and demand picture behind a currency pair is always far more important than the theoretical, fundamental strengths or weakness of the economies behind the currencies. In other words, the perceptions of market participants are much more relevant in defining money exchange rates than realities, or the opinions of scientists. In the long term, on the other hand, currency prices will tend to approach the theoretical values as defined by economics theory
They are watched carefully by economists, business people, and governments
Money exchange rates are quoted, discussed and analyzed by just about all kinds of economic actors, and they are the subject of international meetings, television programs, and essays in newspapers, as well as research papers at educational institutions. That they remain stable and do not go through protracted periods of high volatility is a foremost concern in the minds of policymakers.
Money exchange rates are influenced strongly by interest rates
Money exchange rates are influenced by many different factors, but the most obvious and direct influence is exerted by interest rates of central banks. Since central banks possess the sole legal right to determine the cost of the cheapest money available in an economy through their main rates of lending, their policies are crucial for traders, and economists alike who seek to understand the future of economic activity.
Begin with studying and examining what money exchange rates are if you want to learn forex trading. It will open up a whole new world of knowledge and possibilities to you, and you’ll never regret the experience as a trader.