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FX Rate: What is it?

Today, more people are exposed to financial news, terms and events than perhaps at any other time in recent history.

There are a number of reasons for this; the worldwide financial crisis, front page news stories which outline internal issues with major banks and a population that is more mobile and more concerned with their financial affairs.

Banks and financial institutions seemingly have a fondness for buzzwords, acronyms, and abbreviations. One of the more commonly heard terms, and one that actually affects most of the population is FX.

What is FX?

FX stands for currency exchange, which is the process of buying or selling the currency of one country using the currency of another. The FX market determines the value of different currencies around the world.

Most of us are familiar with FX when on holiday in a country that uses another currency or when sending money overseas.

However, changes in the FX rate have a long list of wide-ranging effects. Changes in currency values can be seen in grocery stores, at petrol stations, department stores and even at online retailers.

How FX works

The FX market is open around the clock almost all year-round. Traders set the rates for buying and selling all of the world’s currencies.

While the FX market can be incredibly complex there are five basic factors that can affect the value of a currency.

Supply and demand – Supply and demand is the basic economic concept that applies to all commodities including currency. Governments will often make their own currency less valuable in order to increase exports. Typically, this is accomplished by the government buying large amounts of a foreign currency. This lowers the price of the currency used to make the purchase and increases the value of the currency being purchased.

Political and economic stability – Most of the factors that influence currency values are fairly straight-forward and fact based. Political stability is often a complex combination of emotional and intellectual factors. Elections, government regulations, natural disasters, and terrorist attacks can all influence the global FX market. Brexit is a prime example. The pound dropped in value following the referendum with worldwide implications. The election of Donald Trump created uncertainty in the future of the US economy. The election of Emmanuel Macron as France’s president had little effect on the FX markets; that story would be entirely different if Marine Le Pen had won the election. 

Interest and inflation Rates – Interest and inflation rates are perhaps the main driving force in setting a currency’s value. National banks, such as the Bank of England and the US Federal Reserve attempt to control currency values, maintain economic growth and manage inflation by setting national interest rates.

Government debt – Government debt is a hot political topic and a complex economic issue. It helps to look at a government as an individual. Governments have credit histories just a individuals do. Governments which are unlikely to default on their debts have currencies with strong and stable exchange rates.

Balance of trade – If a country imports more than it exports it has a trade deficit. In general, countries with high trade deficits have a weaker currency. However, like all large scale economic issues, balance of trade is only a part of the complex issues that affect the economy.

Other economic buzzwords

As we mentioned at the beginning of this article, the economic community has a fondness for buzzwords. In fact, many financial publications routinely publish annual lists of the top buzzwords. Here are some of the most popular at the moment.

Blockchain – This is the technology behind the cryptocurrencies like bitcoin. The concepts behind bitcoin and the dozens of other cryptocurrencies are complex and the markets are extremely volatile.

Fintech – Fintech is a combination of ‘finance’ and ‘technology’. They are the new wave of financial products and services that are seen as disrupters to the traditional financial institutions. TransferGo falls into the fintech sector.

Biometrics – This is the technology that is gradually replacing passwords to verify a user’s identity. Biometrics include voice and face recognition, fingerprint scans and retina scans.

EMV – EMV stands for the three companies that drive new technology around credit/debit card security; EuroPay, MasterCard and Visa. Making credit card transactions more secure and eliminating fraud has been a concern for many years. Chip cards are becoming the standard and are seen as a major advance in card security. 

The TransferGo blog regularly publishes articles which help our readers increase their understanding of various economic products and concepts, such as our recent article on cryptocurrencies. You can find our other articles about economic terms and concept here.


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