EURO.uz -The Forex quick guide for beginners and private traders

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The Forex quick guide for beginners and private traders


The basic theories underlying the US dollar to euro exchange rate
Law of One Price: In competitive markets, free of transportation cost barriers
to trade, identical products sold in different countries must sell at the same
price when the prices are stated in terms of the same currency.

Interest rate effects: If capital is allowed to flow freely, exchange rates
become stable at a point where equality of interest is established.

The dual forces of supply and demand


These two reciprocal forces determine euro vs. US dollar exchange rates.

Various factors affect these two forces, which in turn affect the exchange
rates:
The business environment: Positive indications (in terms of government
policy, competitive advantages, market size, etc.) increase the demand for
the currency, as more and more enterprises want to invest in its place of
origin.

Stock market: The major stock indices also have a correlation with the
currency rates, providing a daily read of the mood of the business
environment.


Political factors: All exchange rates are susceptible to political instability and
anticipation about new governments. For example, political instability in
Russia is also a flag for the euro to US dollar exchange, because of the
substantial amount of German investment in Russia.

Economic data: Economic data such as labor reports (payrolls, unemployment
rate and average hourly earnings), consumer price indices (CPI), producer
price indices (PPI), gross domestic product (GDP), international trade,
productivity, industrial production, consumer confidence etc., also affect
currency exchange rates.

Confidence in a currency is the greatest determinant of the real euro to US
dollar exchange rate. Decisions are made based on expected future
developments that may affect the currency.

Types of exchange rate systems


An exchange can operate under one of four main types of exchange rate
systems:
Fully fixed exchange rates
In a fixed exchange rate system, the government (or the central bank acting
on its behalf) intervenes in the currency market in order to keep the exchange
rate close to a fixed target. It is committed to a single fixed exchange rate
and does not allow major fluctuations from this central rate.

Semi-fixed exchange rates


Currency can move within a permitted range, but the exchange rate is the
dominant target of economic policy-making. Interest rates are set to meet
the target exchange rate.

Free floating


The value of the currency is determined solely by supply and demand in the
foreign exchange market. Consequently, trade flows and capital flows are the
main factors affecting the exchange rate.

The definition of a floating exchange rate system is a monetary system in
which exchange rates are allowed to move due to market forces without
intervention by national governments. The Bank of England, for example,
does not actively intervene in the currency markets to achieve a desired
exchange rate level.

With floating exchange rates, changes in market supply and demand cause a
currency to change in value. Pure free floating exchange rates are rare - most

governments at one time or another seek to "manage" the value of their
currency through changes in interest rates and other means of controls.

Managed floating exchange rates


Most governments engage in managed floating systems, if not part of a fixed
exchange rate system.

The advantages of fixed exchange rates


Fixed rates provide greater certainty for exporters and importers and, under
normal circumstances, there is less speculative activity - though this depends
on whether dealers in foreign exchange markets regard a given fixed
exchange rate as appropriate and credible.

The advantages of floating exchange rates


Fluctuations in the exchange rate can provide an automatic adjustment for
countries with a large balance of payments deficit. A second key advantage of
floating exchange rates is that it allows the government/monetary authority
flexibility in determining interest rates as they do not need to be used to
influence the exchange rate.

The EUR-USD has dropped? So what!
(you can profit in any direction it takes, provided you chose the winning direction:)

 

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