Foreign Exchange Market

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The foreign exchange market in which participants are able to buy, sell exchange and speculate on currencies. Foreign exchange markets are made up of banks, commercial companies, central banks, investment management firms, hedge funds, and retail forex brokers and investors. The forex market is considered to be the largest financial market in the world. Cited: Boyes & Melvin 9th edition Economics

Foreign exchange markets are important to any firm that imports or exports as part of its business. It allows a business in the United States to import goods from the European Union member states, especially Eurozone members, and pay Euros. It also supports direct speculation in the value of currencies, and the carry trade, speculation based on interest rate differential between two currencies. Without the foreign exchange market, it would be very complicated and very lengthy negotiations to get the goods in and out of the countries. Only tourism and a few other transactions in the foreign exchange market involve an actual movement of currency. Cited: Publicado el May 24, 2013

If the U.S. currency is decreasing versus other currencies of countries it trades with, that will affect the U.S. Company, it means that a larger number of dollars can be procured with the same number of units of any other country. A depreciation in any currency would make it easier for the US exporters to sell their products to other countries as they would be less expensive for the buyers. On the other hand depreciation in the dollar would decrease the number of units of another country???s currency that can be bought with the same number of dollars and this would make products imported from other countries more expensive. Cited: justaguide on November 9, 2011

Under a fixed rate system only a decision by the countries government or monetary authority can alter the official value of the currency. Devaluation the deliberate downward adjustment in the official exchange rate reduces the currency???s value; in contrast a revaluation is an upward change in the currency???s value.

For example suppose a government has set 10 units of its currency equal to one dollar. To devalue it might announce that from now on 20 of its currency units will be equal to one dollar. This would make its currency half as expensive to Americans and the US dollar twice as expensive in the devaluing country. To revalue the government might change the rate from 10 units to one dollar to five units to one dollar. This would make the currency twice as expensive to Americans and the dollar half as costly at home.

Sources

www.newyorkfed.org/aboutthefed/fedpoint/fed38.html

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