| | Currency prices are determined by a number of
factors, the most important of which are economic and political conditions in
the issuing country. Political stability, inflation, and interest rates are all
factored into the price of any currency. In addition, 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, however, it is impossible for one force
to control the market 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 Bid Ask
USD/CAD 1.2392 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 1.24060 0.83935 0.56870
Ca $ 0.80606 1.00000 0.67657 0.45841
Euro 1.19140 1.47805 1.00000 0.67755
UK £ 1.75840 2.18147 1.47591 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.
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