Currency prices are determined by
a number of factors, the most important of which are economic and
political conditions in the issuing country. Three major items, political
stability, inflation, and interest rates, are all factored into the
price of any currency. In addition, many times, governments can try to
control the price of their currency by either flooding the market (to
lower the price) or buying extensively (to raise the price).
Because of the immense volume of FOREX transactions and the sheer size of the market,
however, it is impossible for one force to control market movement for any
length of time. Market forces will prevail in the long run,
making FOREX one of the most open and fair investment opportunities
available.
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).
Prices of foreign exchange are indicated by
FOREX quotes in pairs of currencies. 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 stronger –
one unit of the base currency will buy more of the quote currency. If
the quote currency falls, however, the base currency is becoming
weaker.
FOREX quotes are seen in 'bid' and 'ask'
prices. Bid is the price that buyers will pay for the base currency
(while selling the quote currency), and ask is the price that sellers
will sell the base currency (while buying the quote currency).
Symbol
USD/CAD
|
Bid
1.2392
|
Ask
1.2397
|
This chart tells us that we can buy one American dollar for 1.2397
Canadian dollars, or sell one American dollar for 1.2392 Canadian
dollars. The most commonly traded currencies pairs are the "Majors"
– GBP/USD, EUR/USD, AUD/USD, USD/JPY, USD/CHF, and USD/CAD.
We often see exchange rates listed in cross
currency charts that list many different currencies and their values
against each other. An example of such a chart is seen here:
US $
Ca $
Euro
UK £
|
US $
1.00000
0.80606
1.19140
1.75840
|
Ca $
1.24060
1.00000
1.47805
2.18147
|
Euro
0.83935
0.67657
1.00000
1.47591
|
UK £
0.56870
0.45841
0.67755
1.00000
|
In this chart, the currencies listed down the left side of the chart
are the base currencies and the currencies at the top are the quote
currencies. We can convert the chart above into currency pairs by
following the row beside the base currency. Using US dollars as the
base currency we get the following currency pairs:
USD/CAD = 1.24060
USD/EUR = 0.83935
USD/GBP = 0.56870
...which tells us that one US dollar is equal to the corresponding
value of the quote currency. To find the opposite pair e.g. CAD/USD
follow the Canadian dollar row to the US dollar column - CAD/USD =
0.80606 (one Canadian dollar is worth 0.80606 US dollars).
There is no standard for cross-currency
charts – some have the base currency on the top and some have
it on the side. How to tell which is which? You need to know at least
one pair of currencies and which one of the pair is more valuable.
