What is Foreign Exchange Market

The foreign exchange market is a market that trades the domestic currency of one nation for the domestic currency of another nation. A relatively active foreign exchange market, for example, trades US dollars and British pounds. The global economy is actually comprised of a series of foreign exchange markets. US dollars are also traded for Japanese yen, Mexican pesos, Canadian dollars, and a host of other currencies in assorted foreign exchange markets.

Foreign exchange rates policy of government towards the level of the exchange rate of its currency. It influences the exchange rate by using its gold and foreign currency reserves held by its central bank to buy and sell its currency. It can also use interest rates to alter the value of the currency. A fall in the exchange rate will mean that the price of imports will rise while exporters can choose either to lower prices for their buyers or  leave them the same and increase their profit margins. As a result, domestic producers should become more internationally competitive. Import volumes should fall while export volumes should rise. Output at home should rise, leading to higher economic growth and a fall in unemployment. There should also be an improvement in the current account of the balance of payments as the gap between export values and import values improves. However, higher imports prices may fuel a rise in inflation in the economy.

The exchange-rate regime is the way a country manages its currency in relation to other currencies and the foreign exchange market. It is closely related to monetary policy and the two are generally dependent on many of the same factors. The basic types are a floating exchange rate, where the market dictates movements in the exchange rate; a pegged float, where a central bank keeps the rate from deviating too far from a target band or value; and a fixed exchange rate, which ties the currency to another currency.



Meaning of Foreign Exchange Market

The foreign exchange market is a market that trades the domestic currency of one nation for the domestic currency of another nation. The foreign exchange market assists international trade and investment by enabling currency conversion. For example, it permits a business in the United States to import goods from the European Union member states especially Euro zone members and pay Euros, even though its income is in United States dollars.

Meaning of Foreign Exchange Rate

Foreign exchange rate refers to an exchange rate between two currencies at which one currency will be exchanged for another. It is also regarded as the value of one country's currency in terms of another currency. Exchange rates are determined in the foreign exchange market, which is open to a wide range of different types of buyers and sellers where currency trading is continuous 24 hours a day except weekends.

Objectives of the Foreign Exchange Rate Policy

Monetary policy strategies have been implemented within a flexible exchange rate scheme that is governed by intervention rules with the following objectives:

(i) To maintain an adequate level of international reserves that will lessen the economy's vulnerability to external shocks, both in the current and capital accounts.

(ii) To limit excessive volatility of the exchange rate in the short-term.

(iii) To moderate excessive appreciation or depreciation of the nominal exchange rate that could jeopardize the achievement of future inflation targets, as well as the economy's external and financial stability.

The foreign exchange  market is actually a series of different markets, each exchanging the currency of one nation for that of another nation. A foreign exchange market sets the price of one currency in terms of the other; a price termed the foreign exchange rate, or simply exchange rate. The impact of government exchange rate policies, including fixed exchange rates, flexible exchange rates, and managed flexible exchange rates, can be illustrated using the foreign exchange market.

The foreign exchange market is a market that trades the domestic currency of one nation for the domestic currency of another nation. A relatively active foreign exchange market, for example, trades US dollars and British pounds. The global economy is actually comprised of a series of foreign exchange markets. US dollars are also traded for  Japanese yen, Mexican pesos, Canadian dollars, and a host of other currencies in assorted foreign exchange markets.

Like any market, the foreign exchange market works with two variables price and quantity. The quantity exchanged is one of the two currencies and the price is then specified in terms of other currency. In the foreign exchange market for US dollars and British pounds, British pounds are the quantity exchanged and the price is then specified as US dollar per British pound. Alternatively this market can be viewed from the other side of the exchange such that US dollars are the quantity exchanged and the price is specified as British pounds per US dollar.

The exchange of currencies through foreign exchange markets is needed, in part, to facilitate the international trading of goods and services, When nations import and export goods and services they also need to exchange domestic currencies for foreign currencies. The import purchase of a Japanese  car by a US consumer requires that US dollars the currency used by the US consumer for the initial purchase be exchanged for Japanese yen the currency used to pay Japanese resources for the production.

However, in addition to international trade, foreign exchange markets also facilitate the flow of capital investment among countries. Should a Japanese investor, for example, seek to purchase or construct capital goods in the United States, then Japanese yen needs to be exchanged for US dollars.

No comments:

Post a Comment