FOREX TRADING: ITS IMPACT TO THE ECONOMY

2007-03-08 10:33:40

( Financial )



What is forex trading

Forex trading determines the cost of purchasing foreign items and financial assets. It affects the daily lives of American households when the dollar becomes less valuable compared to other foreign currencies. The cost of items and services becomes more expensive. Consequently, when the dollar increases its value, items and services becomes cheaper in the United States while becomes more expensive abroad.

The market for forex is very competitive with a large volume of transactions worldwide. Trading is done over the counter wherein many traders are ready to buy and sell deposits in foreign currencies. These dealers are mostly bankers whose clients are contacted through phones and internet.

Kinds of Forex Trading

Spot transactions and forward transactions are two kinds of forex trading. Spot transactions are immediate exchange of bank deposits in an average of two days. Forward transactions are exchange of bank deposits which are scheduled longer than spot transactions.

Foreign Exchange Rates

Foreign exchange rates are published daily where buyers and sellers are updated on the rates of currencies in the financial market. Export demand decreases when prices of currencies increases in the market while import demand increases. Export of domestic items becomes costly due to the lesser value of the amount of sales from the items sold abroad. Higher capital expenditure is required with lesser amount of revenues. Exporters might be forced to lower production of their items.

Interest Rates Effect to Foreign Exchange

Interest rates in a country also affect the rate of foreign exchange currencies. Increase in real interest rates results to an increase in the value of the domestic currency. Real interest rates are adjusted to the changes of price levels to reflect the true cost of borrowings. The domestic currency decreases in value when domestic interest rates rise due increase in prices products and services.

Level of Money Supply Impact to Domestic Currency

The level of money supply also affects the value of domestic currency. Large money supply in the domestic currency decreases the value of domestic currency. Thus, the Federal Reserve needs to be vigilant in regulating the supply of money going into the economy.

Forex trading is essential to the direction of the economy. It determines the amount of foreign capital invested in the economy to increase employment opportunities for the residents of the country.


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