Though many Americans complain about the depreciation of the dollar, numerous countries in the world have had a far more depreciating currency that has made them a cheap destination for Americans. Generally, Asia and Latin America are where the dollar goes furthest right now, though other parts of the world also have depreciating currencies relative to the dollar.
In Asia, the dollar has been gaining value in the last few years against the Indian rupee and Vietnamese dong. One American dollar is equal to 54 rupees and 21,000 dong. With a strong dollar compared to these currencies, visiting landmarks such as the Taj Mahal and Hoi An is much more affordable.
In Latin America, the dollar has gained relative to the Honduran lempira and Venezuelan bolivar. Since the middle of 2012, the lempira has lost about five percent of its value relative to the dollar. One dollar now equals about 20 lempiras. Recently, the bolivar was devalued by 50 percent relative to the dollar, making Venezuela more affordable for Americans. However, there is political instability in Venezuela following the death of its leader, Hugo Chavez.
In 2008, one British pound was worth two American dollars, whereas today a pound equals one dollar and fifty cents. In the last five years the pound has therefore lost about 25 percent of its value to the dollar, allowing Americans to enjoy the Big Ben and Buckingham Palace much cheaper.
Exchange rate between two currencies is the rate at which one currency will be exchanged for another. The Exchange rate is sometimes called FX rate.
Exchange rates vary almost daily. This fluctuation in rate happens when demand and supply changes. Currency is worth more when the demand for money is greater than the supply. Currency is worth less when supply is greater than demand. Why would supply be greater than demand? This can happen when people prefer to have their wealth in something other than their country's money. They may invest in other currency, or keep their wealth in something such as gold.
Every country's currency fluctuates, but some countries prefer to keep it within a certain range. Regulating this range typically causes more problems than benefit.
Just to show how much the exchange rate varies, within the past six months, exchange rate between the American dollar and the Euro has changed six times. The value of the Euro started off higher in January of 2012, when one American dollar equaled 0.775004 Euros. The value of the Euro dropped slightly in February through April where it averaged only 0.763763 Euros to one American dollar. Finally now in July the value of the Euro has risen back up to 0.813729 per American dollar.
Each country has similar fluctuation.
Each country in the world has its own form of currency. The United States uses the dollar, the United Kingdom (British) use the pound, the Chines use the yuan. All of these currencies fluctuate in value every day depending on how the trade value of each on any one day. The reason we have currency is to enable consumers to purchase goods. Instead of using gold, as we did a century ago, we use paper so we don't have to keep digging for more gold.
If a person in the United States wanted to travel to Britain for a vacation, they would have have dollars in their hand in the US that would not be of much use in Britain because the British us the pound instead. It would obviously be the same in any other country that does not use dollars as their currency. Therefore, there has to be a method to convert one currency to another. That is the purpose of the foreign exchange rate.
As soon as that American traveler enters the United Kingdom, they enter a foreign exchange booth and convert some of their dollars to pounds for use in that country. The rate between the US and GB is generally $1 for every 1.5 pds because the British pound is set by international markets to be worth 50% more than the American dollar. This means that a good in Britain that costs 5 pds will cost that American traveler 5x1.5=7.5 pds not $5. Without this system, not only would traveling be nearly impossible, but trade would as well. The same system that enables travelers to vacation allows countries to trade goods with on another. Without this system, the US would not be able to import or sell anything and the world economy would collapse overnight.
Many people have heard of a foreign exchange and have no real clue what it is, what it does and why we need it. With all the business going on around the globe every day, the need to be able to properly value and convert currencies is essential. That is the purpose of the foreign exchange.
Most countries will only accept their currency in exchange for goods since it is what they use in every day purchasing and trading. As an example; the US buys oil from Saudi Arabia. In order for the Saudis to accept payment the US must convert the funds into Saudi currency, at the current exchange rate.The whole story can be found at http://www.wantchinatimes.com/news-subclass-cnt.aspx?id=20120726000133&cid=1102&MainCatID=0
Exchange rates fluctuate daily. The rates are set by the national bank of each country and is based upon things like their Gross Domestic Product. Then it is multiplied by the supply and demand of goods being traded.
The foreign exchange is highly regulated and often scrutinized to be sure the trading and rates are fair for all involved. Without the exchange we would be hard pressed as a nation to be able to fairly and accurately trade with other countries. And trade is what helps our economy grow.
The foreign exchange is used by major and minor corporations, banks, and private investors. Generally, it is used by businesses that need another currency to purchase goods and services with. An increasing popular use is sheltering large amounts of money from fluctuations by holding on to it in the form of a currently stable currency or speculating on exchange rates to make profit.
Anyone can use these fluctuations to make huge amounts of money by exploiting exchange rates to their benefit. This is done by speculating, or betting, on currency shifts. For instance, the exchange rate for the U.S. Dollar to the Mexican Peso is 13.2383:1. That means for every dollar you have, you can get 13.2383 Mexican Pesos, or for 13.2383 Mexican Pesos you can get one dollar. So you transfer $10,000 to Pesos based on speculation that the Peso will gain strength. You now have 132,383 Pesos. If the Peso gains strength to 10:1 you can sell your Mexican Pesos for a total of $13,238.30. That would be a total gain of $3,238.30 just for moving money around.
As a consumer you are most interested in the currency you use. If your currency's value is rising, your prices will be lower, if your currency's value is falling, your prices will be higher.
The foreign exchange market has made a lot of money for some people. The market is very large, thus making it very liquid. In fact the foreign exchange market is exponentially larger than the NYSE.
The first step would be to learn the basics of foreign exchange markets, then, opening a practice account to get the feel of it. Once you have made some practice trades, you should have a decent feel for how the foreign exchange markets work. It would be time to open an account now.
You make money by an increase in the currency in which you have made the investment, for example the US Dollar or the Euro. Following national and international events are a great way to make some money and follow the trend. Obviously it is not so easy, otherwise everyone would be rich from it.
But if you can study the markets using a free account, go to online forums, read the news, and follow the trend. You should be able to make a nice return on investment with foreign exchange markets. With it, you can leverage your money, which can be very beneficial to your bottom line, or it can hurt and cause you to lose money quickly.