Foreign Exchange Markets
Foreign exchange market is a ‘market that trades the currencies of different countries. The foreign exchange market is in actual fact a series of different markets, each exchanging the currency of one nation for that of another nation. A foreign exchange market sets the price of one currency in terms of the other; a price termed the foreign exchange rate, or simply exchange rate’ (www.amosweb.com/cgi-bin). Factors that influence foreign exchange rates are the balance of trade, inflation rate and the prevailing real exchange rates. Where a country experiences a trade deficit, which is more imports than exports; its currency will lose value as it means it sells more of its currency to get other countries’ currencies. Where there is a surplus it means other countries demand more of its currency hence there will be a gain in the value of that currency. A country with a higher inflation rate will see its currency losing value. This is because with time that currency will buy less and less of the domestic goods. This loss in purchasing power will be reflected in the loss in value on the forex market. The opposite is also true. If a country’s real interest rate (inflation and risk adjusted) is higher than in other countries, the result is that its currency will appreciate. This is because money market investors will move their money to that country in search of superior retuns on investment. This therefore increases the demand for that country’s currency on the forex market resulting in a gain in value. The opposite is also true for countries with low real interest rates. International Marketing
American Marketing Association defines international marketing as the multinational process of planning and executing the conception, pricing, promotion and distribution of ideal goods and services to create exchanges that satisfy the individual and organisational objectives. International trade is made up of imports, exports, contractual agreements, joint ventures and wholly owned manufacturing companies. Foreign exchange markets and international trade
‘The daily volume of business dealt with on the foreign exchange markets in 1998 was estimated to be over $2.5 trillion dollars. In 2010, the daily volume was about $4 trillion.’ (Foreign Exchange Market, www2.econ.iastate.edu/classes/econ355/choi/fex.htm ). When people in one country demand products from firms in another country, they must they must first of all enter into the foreign currency (forex) market to buy that nation’s currency. Since under normal circumstances one cannot use one country’s currency to do financial transactions in another country, the forex markets therefore act as a conduit through which international trade can happen. For example a Zimbabwean retailer cannot use United States dollars to purchase orders from China, he has to first of all change the US dollars to Chinese Yen before the transactions can be settled. To do this the retailer goes into a barter exchange with someone who has Yen and requires US dollars and the parties agree on an exchange rate. The foreign exchange market performs an international clearing function by bringing together two parties wishing to trade currencies at agreeable exchange rates.
Scenarios on Forex Markets
The exchange rate, which is the price of one currency relative to another, can be determined by the market forces of demand and supply. In this case when demand for one currency rises with the supply of the currency held constant then the value of that currency will appreciate. When the opposite occurs then it will be called depreciation. This is the case in most free economies where a floating exchange rate regime is followed for example the USA, Britain and the South Africa.
Not all countries, however, allow their currencies to move up and down freely because of the effects these movements have on the international competitiveness of their products. Some countries therefore...