Exchange Rates

Archive for the ‘articles’ Category

The foreign exchange market involves more than just looking at current values of currency pairs. It involves the analysis of past values to properly understand the trends in the industry. The relevance of historical foreign exchange rates in the current forex market is undeniable. Just like any other aspect of life, currencies change significantly over the years both in representation and in value. In the 17th century, money was based on gold and silver coins.

Under the gold bullion standard, the value of currencies were determined by a certain number of gold bullion. This value is given a set rate in which the currency can be exchanged. Gold and silver coins were limited to larger transactions and coins made out of brass, tin or copper were used for smaller transactions. Gold and silver had an exchange rate, which changed depending on supply and demand forces. During the medieval period, a unit of gold was equivalent to 12 units of silver. However, due to the surplus of silver discovered in Latin America, the value soon changed to 15 units of silver to one gold by the time 1717 came.

This system proved to be rather problematic, as there was a huge difference in the supply of gold and silver in different areas, resulting in a vast differences in exchange rates in these areas. Without a unified exchange rate, it can be very difficult for merchants and traders to do business. Some took advantage of these differences whereas other experienced significant losses. This was solved for a brief period when each coin was given a value depending on the weight of the metal and the value of the metal beyond that of its face value. However, there were still some significant differences in these values in several areas. Read the rest of this entry »

Financial institutions in London had an increasing demand for a benchmark for lending rates at the beginning of the nineteen eighties. This benchmark was specially needed to compute prices for financial items such as interest swaps and options. The British Bankers’ Association (BBA) took responsibility in 1984 which then led to the dissemination of the first LIBOR interest rates. Historical LIBOR rates have been useful references or sources for LIBOR.

Today LIBOR is acknowledged worldwide as the most significant benchmark for short-term interest rates. It is also used in the professional financial markets as base rates for a huge number of financial items like the options, swaps and futures. In banks, they use LIBOR interest rates as the basis for deciding on savings, interest rates for loans and mortgages. Since LIBOR is widely accepted as the base rate for other items, historical LIBOR rates are now constantly being tracked by numerous professionals, individuals and businesses all over the world.

LIBOR is known as an average interest rate where carefully selected banks undergo a process of lending funds to each other. These selected banks are recognized as “panel banks”. Each year the British Bankers’ Association together with the Foreign Exchange and Money Markets Committee performs the process of selecting banks. A panel for each currency is made at which can be composed of eight to sixteen banks that are chosen to be delegates for the London money market. The basis for a bank’s candidacy to be in the panel is its reputation, market volume and understanding of the currency. Read the rest of this entry »

Anyone who is a student of economics would agree that most of the charts and ratios from your class did not seem to be too practical, meaning you could not take the things you were learning and immediately apply them in real life. This background in economics, however, is essential to understanding the core relationships in the global economy if you want to make real investments in stock markets or the foreign exchange market.

When it comes to trading the forex market, understanding certain fundamental factors such as interest rates and how they relate to a specific country’s economy should become second nature, and it is the boring theory that you learned in your economics class that can help to solidify this essential understanding. In order to go out in the real world and find profitable investments, you need to first learn all of the theories that allegedly govern the behavior of money and the financial markets. It is only when you understand how most people think the economy should behave that you can then identify which instances that it is going against typical economic theory, which then might present a viable buying or selling opportunity.

Much of the foreign exchange activity that occurs today between the major currencies centers around the United States dollar, and the currency pairs that most brokers call the “majors” are currencies like the pound or euro that are traded against the dollar. As such, when there is a fundamental shift in the American economy, such as a shift in short-term interest rates, there is a profit opportunity to either buy or sell the dollar against these other currencies.

As traditional economic theory goes, when the Federal Reserve lowers short-term interest rates it should stimulate business growth in the economy since the cost of conducting business is lower. This is why the Fed will usually lower interest rates when it is time to grow the economy, and they will increase interest rates when it comes time to curtail economic growth. Read the rest of this entry »