Impact of Exchange Rate on Forex

Any forex trader, should understand the exchange rates and the impact of exchange rates on forex. The exchange rate in general terms is defined as the relative price of one currency against one another.

Suppose consider the case of dimes and dollars. If suppose, one has 10 one-dollar bills. And each dollar worth 10 dimes. If you go to bank for exchanging the 10 dollar bills. Then 10 dollar bills will worth 100 dimes. Hence the exchange rate will be DOL/DIM= 10/100=0.1 or DIM/DOL=10.

So, hence the exchange rate is the relative change in the worth of the currencies and it changes very frequently on a daily basis. They however, sometimes be very high and sometimes be very low. For understanding the market let us consider a simple example, If you want a quantity which costs in dimes and if you have the dollars , it is worthless. So, you will negotiate and ask the shopkeeper for paying 2 dollars for 17 dimes. That means that each dollar will worth some 8.5 dimes which is less when compare to the 10 dimes. So, the rate will change from 0.1 to DOL/DIM= 2/17=0.11. So, there will be loss if we take the case of 10 dollars, we will get $90 instead of $100 according to the changed exchange rate. So, every country has its own currency and depending on that the exchange rate will be changing.

In order to market in the world, the exchange rate is much more important. Supply, interest rate and also the demand will change the exchange rate. Mainly the interest rate plays a major role on the exchange rate. Suppose if the interest rate is more in the foreign country when compared to your own country then the traders want to trade their money to the other countries to earn more profits which is called as the forex trading. Even the inflation rate is also influencing the exchange rate. Suppose inflation rate in the own country is high, then the value of the money goes on decreasing, then the people want to trade the money. If it is thye reverse case then the people want to trade the money in the own country.

If we trade with the other countries, then the exchange rates also differs. In some cases, when the exports are more than the imports, then worth with the sold goods will be more than the worth with the import goods.