Currency Conversion Rates

The Forex market was set up to make sense of and give stability to currency conversion rates. Currency conversion rates are the rates at which the money of one country is exchanged for the money of another country. For example, the current rate of exchange between the US dollar and the Mexican peso is 13.24 pesos to the dollar. As a simple example, you deal with currency conversion rates when you change dollars for pesos, dollars for Yen or British pounds for US dollars at a money changer when you are traveling. But these rates are different from official currency conversion rates. That is because the money changer needs to make a profit and quotes different rates for buying and selling one currency versus another. Currency conversion rates are better when you use your VISA card because the company gets the Forex rate established by daily online currency trading. And, it is the international business community and central banks the set official currency conversion rates with which we are concerned today.

Supply and Demand Sets Prices

The major Forex markets are London, New York and Tokyo. Because these markets are spaced out around the planet there is active currency trading virtually twenty-four hours a day on each and every business day throughout the year. In Forex markets currency conversion rates are quoted as spot rates which is the current exchange rate and forward exchange rates which is the rate traded today but for delivery at a specified later date. The strength of an economy, interest rates of a country and central bank policy determine the strength of one currency versus another. If interest rates go up in the USA and down in Brazil traders tend to buy US dollars. If US employment numbers falter while Japan’s economy is humming along the dollar tends to fall versus the Yen. Currency conversion rates are largely determined by what traders believe will happen in the near future as market sentiment ebbs and flows.

Central Banks, National Economic Policy and Politics

Currency conversion rates are not solely determined by economic and interest rate factors. A prime example is the use of currency manipulation by exporting nations to keep their currency cheap in order to sell more products to other nations. Japan has a history of selling products to the USA and then keeping the dollars that they receive as a reserve currency. They do this rather than converting dollars received into Yen. This has the effect of buying dollars with Yen and tends to raise the value of the dollar and reduce the value of the Yen. Taiwan followed suit with this strategy as did South Korea and eventually China entered the picture and kept their dollars as profits and bought US treasury bills to boot. This sort of currency manipulation stems from well thought out economic and monetary policies and has had the effect to stimulating Asian economies at the expense of North America and Europe. Trading foreign currencies takes place for two reasons. One is international business such as described with China, Japan and the rest of the world. The other is currency speculation. Trillions of dollars in currencies are exchanged every trading day. This provides a lot of room for speculation on changes in currency conversion rates and those who read the signs correctly and trade accordingly can make a lot of money. On the other hand those who enter the Forex markets unawares can experience heavy losses. As always if you choose to trade currencies do your homework and sit on the sidelines if things do not make sense.