Know How the Financial Markets Move with Currency Rates

by Salvador Paez

The currency rate, or the exchange rate specifies the value of one currency in terms of another currency. Also known as the foreign exchange rate or forex rate, the currency rate is the most important aspect in a trillion dollar worldwide market. With their importance, there are many factors that affect the rates of currencies all over the world. This can range from the political issues in the country to the amount of investment that the country receives.

The reason there are different types of exchange rates is because there are also many different ways to measure currency rates. The current exchange rate is referred to as spot exchange rate. This is based on the total amount of currency traded on a daily basis What is referred to as the forward exchange rate is the specific exchange rate for a specific currency quoted and traded today but to be paid on a specific date in the future.

That the exchange rate of one United States dollar is a hundred and twenty three Japanese yen is one of the best examples of how a currency rate works.

In the world foreign currency market, currencies are usually paired and then traded. One example of the most popular currency pairing is the EUR/USD pairing. The first component in this pairing is the euro, or EUR, which is known as the base currency. The US dollar is then called the counter currency. Whenever any amount is indicated, that amount then refers to the exchange rate of a euro to a dollar. For example, if the equation says EUR/USD = 1.33866, then it only means than one euro is equivalent to 1.33866 US dollars.

The normal four decimal places are given for all the currency pairs except for the Japanese yen which receives two decimal places. When the rates are below one, currency rates should be properly given in five digits, and in five decimal places. The most paired and traded currencies in the world are the United States dollar, the Euro, the Japanese yen, the British pound, the Swiss franc, the Australian dollar, and the Canadian dollar.

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