Exchanging Currencies Is Mystifying For Newcomers | Financial ...

Newcomers to the foreign exchange or forex market are often overwhelmed by how rapidly it changes. Currency values can behave as if the currencies in question have bipolar disorder. They race up against other currencies and then fall back down with equal speed. World events play decisive roles in changing conditions for this market. A country?s currency represents its prospects for the future. Negative events, whether economic or geopolitical, have a negative impact on the value of the currency relative to other currencies.
How Currency Exchange Works
All the participants in the forex market buy and sell currencies. This simple fact has enormous repercussions when the nature of the participants is considered. They include foreign governments, international finance houses, multinational corporations, tourists, business travelers and central banks. Central banks are the heavyweight champions in forex. They are directly responsible for the value of a particular currency because of their control over domestic monetary policy.
For individual traders, the actual details of trading currencies are similar to trading in other financial markets, such as the equity market. One difference is how participants make a profit in forex. No one buys or sells one currency at a time. Since there is no independent currency to which all of the other currencies can be compared, every currency is valued against every other currency by pairing them together.
A participant thus buys one currency and sells another in the hope or educated guess that the currency they bought will increase in value compared to the currency they sold. This can backfire if the participant makes a wrong guess or misjudges a trend. Tourists are sometimes amazed at how much relative currency values can change. When they come home after a trip to a foreign country expecting a certain amount of money left over, currency shifts often result in more or less money than they anticipated. Such is the power of the forex market.
Currency Exchange Services
Newcomers to the forex market would be wise to take advantage of currency exchange services that can provide reasonably accurate estimates of currency values. Many forex participants, like the big financial institutions, have their own in-house trading desks dedicated to forex. The majority of market participants outside of these desks and their clients do not have access to the finance houses? research or data. Currency exchange services can provide regular citizens, who do not belong to international finance or trade the forex market, with information to help them make a decision about traveling.
These services come in handy no matter the destination. Fortunately for American tourists, the U.S. dollar is still the world?s preeminent currency used for forex transactions. Americans can sometimes use dollars in foreign countries for certain purposes, although this is only true part of the time. Most citizens who participate in forex on an infrequent basis only need currency exchange services on rare occasions.
Crisis And Opportunity
Crisis events in the forex market express themselves as rapidly changing currency values. During the 2008 financial crisis, for instance, the U.S. dollar index soared as the dollar strengthened against the major currencies. After the 2011 Great Japanese Earthquake, the Japanese yen strengthened so rapidly it bankrupted many traders who were using it to execute a common tactic known as the carry trade. Currency exchange services can help travelers deal with these crises or wait them out until they pass.
Michael Gritchie strives to continually learn everything there is to know about money to become an expert so he can teach others how to master the art as well. Excellent resources are found at OANDA, Investopedia, and the plethora of personal finance web sites on the internet.

Source: http://financial-com.info/2013/01/exchanging-currencies-is-mystifying-for-newcomers/

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