How Foreign Exchange Rates Work

How Foreign Exchange Rates Work

This article explains how foreign exchange rates work especially in relation to the Singapore dollar.

Foreign exchange rates are used to determine how currencies are traded in the foreign exchange market. Currencies are usually traded in pairs, and the forex rate indicate how much of one currency can be exchanged for the other currency in the currency pair. Currencies listed for trading in the forex market are assigned different values base on their perceived strength. Currencies that are in high demand in the forex market will tend to have strong values. If investors do not find a currency desirable, its value will fall in the markets.

Traders are usually keen on the foreign exchange rates that represent the currency pairs they are trading. Since currency values change continuously, the forex rates will also change. Such changes in the foreign exchange rates determine how traders are going to trade. The rates are given to the fourth decimal point and even the slightest changes at this level are very significant in foreign exchange trading. The price movements are measured in terms of pips, with one pip representing the slightest movement – up or down – at the fourth decimal point. During trading, gains and losses are counted in terms of pips whenever the forex rates fluctuate.

Factors affecting foreign exchange rates

In order to understand foreign exchange rates, you must know what influences currency prices. In general, the value of a currency will depend on the economic performance of its original country. Singapore may be a small country but the Singapore dollar is one of the most traded currencies in the whole world. This can be attributed to the strong performance of Singapore’s economy over the years, creating a demand for the currency in the global foreign exchange market. The Singapore dollar is now the 13th most traded currency in the world, even doing better than the Korean Won. The U.S. dollar tops the list of most traded currencies followed by the Euro, British pound, Japanese Yen, Swiss Franc, Canadian dollar and Australian dollar.

Forex traders prefer to trade in their local and regional currencies alongside the leading currencies of the world. It is therefore no surprise that the most traded currency pairs in Singapore are the SGD/USD and the SGD against the Malaysian Ringgit. The value of the Singapore dollar is managed within a trade-weighted band rather than the conventional usage of interest rates. This makes it a little harder for forex traders to monitor or predict its trading trend using economic factors like interest rates and inflation. The U.S. dollar and the Euro are used when determining the value of the SGD. Nevertheless, the economic performance of Singapore still plays a big role in determining foreign exchange rates involving the Singapore dollar.

The large banks and financial institutions that engage in foreign exchange trading usually determine their own foreign exchange rates. This is because they trade currencies in bulk and are therefore able to negotiate favourable rates between them. Forex trading companies also buy currencies in bulk from these large banks and they get them at favourable prices. This enables the forex trading companies to offer competitive foreign exchange rates to their clients.

As a forex trader, it is imperative that you trade using the latest foreign exchange rates at any time. The ever-changing forex market means that delayed forex rates would put you in jeopardy since you will be trading using wrong information. Many forex brokers provide forex rates in real time so that traders can see the changes even as they participate in trading. There are also mobile applications that enable you get the latest forex rates even when you are not at your personal computer so that you do not miss out on any changes.

 

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