Exchange Rates Currency

Currency is the foundation of the largest financial market in the world: the global system of foreign exchange markets. These markets are dependent upon exchange rates. Currency is traded between countries, based on the central premise that different currencies can be compared in value based on the state of national economies, global trade flows, and other similar variables.

All currencies have a three letter code, defined by the International Organisation for Standardisation (ISO). This removes confusion caused by several countries having the same name for their currency.

Reserve Currency

Central banks control the distribution and production of currency, and can also try and influence exchange rates. Currency reserves are stocks of a country’s own currency or a global reserve currency that are stored in central banks and can be sold or added to as is necessary: countries can buy and sell their own currency in an attempt to influence its value, or they can use stocks of a reserve currency to try and influence its exchange rate.

A central bank can buy its own currency using the reserve currency stores. This changes the exchange rate; currency demand directly affects exchange rates – the higher the demand, the more the currency is generally worth, all other things being equal. Central banks do this to try and keep their exchange rate stable.

Foreign Exchange Trading

Banks are the largest participants in foreign exchange trading (also known as forex trading). They buy and sell currency in large volumes to attempt to profit from movements in currency values, and often deal in a large number of international currencies. They occasionally use brokers to conduct the bank to bank trades for them, who try to find the best deals.

Foreign Exchange Markets

Foreign exchange markets can be used to make money by trying to predict the rise and fall in exchange rates. Currency which a forex trader believes is going to fall in value can be sold at a high price. Once the exchange rate falls, they can buy back more of the currency than they originally sold. Conversely, currency that the trader thinks will rise in value can be bought, and then sold if the trader’s judgement is proved correct.

Forex Trading

Large businesses also often participate in forex trading, as trading internationally is usually either done via the dollar or the importers currency. When exporting their goods, they may need to trade currency in order to make the trade.

Tourist Currency Exchange Rates

Tourists also participate in foreign exchange trading, although this makes up a small percentage of the sum total of forex trading and has little effect upon exchange rates. Currency is usually exchanged at banks, hotels or airports.

Tourists currency exchange rates are usually less favourable is the case for the large organisations that commonly use the forex trading system. Currency trading is done by the bank, airport or hotel and these bodies make a small profit by charging a commission, but their main income derives from the unfavourable exchange rate they offer tourists and other occasional customers . If needing to convert currency for a holiday it is a good idea to look at numerous bureaux de change to find the best exchange rates available. Banks, hotels and airports are common sources of foreign currency exchange. Airports have particularly high rates, as often tourists are left with little choice but to exchange their money there and airport traders take advantage of this.

Banks usually offer the best rates for tourists, as they buy large amounts of currency at wholesale prices and are able to pass this discount onto customers. Larger banks have a lower foreign currency exchange rate, as they usually do not use brokers to conduct their foreign exchange trading. This reduction in cost can again be passed on to the tourist.