Foreign Exchange Market: What Important System in This?

Introduction

This part of the essay discusses the various activities that take place in the foreign exchange market. Background information about the subject has also been highlighted.

Foreign Exchange Market

The trading of goods and services among different countries necessitates the need to buy, sell or borrow foreign currencies. For example, when an exporter in Australia sells goods to a buyer in Japan, the valuation of the goods will be in the Australian dollar or Japanese Yen. The buyer will have to purchase dollars with a yen to make payments for the goods priced in Australian dollars. The banks have provided the companies with foreign currency bank accounts for both receipts and payments so that the traders do not have to buy or sell foreign currency every time they carry out international trade transactions (Cloye 2). Foreign exchange markets are known as FX and this is where the trading of major currencies takes place. Exchange rate refers to the price at which one currency is traded in exchange for another and this is determined by the level of supply and demand of both currencies (Cloye 3). Inflation, as well as interest rate, is the common economic factor that influences the basic currency value. However, the fundamental analysis of such factors cannot determine the exchange rate of the currency alone. The participants in the foreign exchange markets are able to influence the movement of the exchange rate with their trading strategies. The Reserve Bank of Australia is in charge of regulating foreign exchange trading as well as licensing dealers who carry out the trading on behalf of their clients. Banks are also allowed to participate in foreign markets trading. Banks have increased their revenue by venturing into foreign currency trading as they are able to make a profit when there is a variation in the exchange rate of the currency they are trading on.

The reserve bank can make the Australian dollar depreciate or appreciate. For example, when the reserve is low-level at a low level exchange rate, the Australian dollar depreciates. However, the movement of the exchange rate cannot be determined by the reserve bank since there are more factors involved. The trading in the Australian foreign exchange market takes place throughout the day. The US dollar is the most traded currency in the foreign exchange market and this shows the huge impact that the USA economy has on the global economy (Cloye 11). There are two major FX transactions. The first transaction is where the non-bank customer buys or sells currency from the bank in order to perform or execute a trading transaction. This is referred to as a trade transaction (Cloye 12). The other transaction is called inter-bank transactions where currencies are traded between banks. This usually involves huge quantities of foreign currencies (Cloye 12).

Conclusion

The foreign exchange market is hard to control. Fundamental economic factors like inflation and interest rate are not the only factors that determine the value of a given currency.

Works Cited

Cloye, Brian. Foreign Exchange Markets. Chicago: Dearborn, 2000. Print.