1. Currency prices
Factors such as economic and political conditions deeply affect currency prices. Political stability, inflation, and interest rates are all factored into the price of any currency. The price of currency can be controlled by governments who flood the market or buy extensively.
2. Volume of FOREX
No force can have dominate the market due to the volume of Forex.Market forces will prevail in the long run, making FOREX one of the most open and fair investment opportunities available.
3. World Currency
Each world currency is given a three letter code which is used in FOREX quotes. The most common currencies are USD (US dollars), EUR (European euros), GBP (United Kingdom pounds), AUD (Australian dollars), JPY (Japanese yen), CHF (Swiss francs) and CAD (Canadian dollars).
4. Foreign exchange prices
Forex quotes can be used to determine prices of foreign exchange. The first currency is the 'base' and the second is the 'quote' currency. In this example: USD/EUR = 0.8419 the currency pair is US dollars and European euros. The base currency (USD) is always at '1' and the quote currency shows how much it costs to buy one unit of the base currency. In this example, 1 US dollar costs 0.8419 euros. Conversely...EUR/USD = 1.1882 ...tells us that it costs 1.1882 US dollars to buy 1 euro. When the price of the quote currency goes up it indicates that the base currency is becoming strongerone unit of the base currency will buy more of the quote currency. The base currency is made weaker when the quote currency is weak.
5. Central banks
National central banks play an important role in the foreign exchange markets. They try to control the money supply, inflation, and/or interest rates and often have official or unofficial target rates for their currencies. They can use their often substantial foreign exchange reserves, to stabilize the market. Milton Friedman argued that the best stabilization strategy would be for central banks to buy when the exchange rate is too low, and to sell when the rate is too high - that is, to trade for a profit. Nevertheless, central banks do not go bankrupt if they make large losses, like other traders would, and there is no convincing evidence that they do make a profit trading.
The mere expectation or rumor of central bank intervention might be enough to stabilize a currency, but aggressive intervention might be used several times each year in countries with a dirty float currency regime. Central banks do not always achieve their objectives, however. The combined resources of the market can easily overwhelm any central bank. Several scenarios of this nature were seen in the 1992-93 ERM collapse, and in more recent times in South East Asia. |
