FX

Foreign Exchange

Also known as the FX rate, it’s the value of one currency in terms of another currency. It indicates how much of one currency is needed to exchange for a given amount of another currency. Foreign exchange rates are used to determine the relative value of different currencies and are vital for international trade, investments, and travel.

FX rates can be either floating or fixed:

1. Floating exchange rates: Most of the world’s currencies have floating exchange rates, which means their values fluctuate based on market forces, such as supply and demand. Factors that influence floating exchange rates include economic indicators, interest rates, inflation, political stability, and market sentiment.
2. Fixed exchange rates: Some countries maintain fixed exchange rates, where their currency’s value is pegged to another currency, such as the US dollar or the euro, or to a basket of currencies. Central banks intervene in the foreign exchange market to maintain the fixed exchange rate by buying or selling their currency as needed.

FX rates can be quoted in two ways:

1. Direct quote: The number of units of the domestic currency needed to purchase one unit of the foreign currency. For example, if you’re in the US and the direct quote for EUR/USD is 1.10, it means that 1.10 US dollars are required to buy 1 euro.
2. Indirect quote: The number of units of the foreign currency needed to purchase one unit of the domestic currency. Using the previous example, the indirect quote for EUR/USD would be 0.9091 (1/1.10), meaning that 0.9091 euros are needed to buy 1 US dollar.

Foreign exchange rates are constantly changing due to market forces, and traders and investors use various tools and strategies to predict and capitalize on these fluctuations. For individuals, the foreign exchange rate is essential when traveling to other countries, as it determines the amount of foreign currency they can obtain with their domestic currency.

• Abbreviation: FX