Currency Exchange Explained: How The World Economy Works

Currency exchange is vital to the globalised economy that we live in. Through exchanging currencies, trade can occur between countries that utilise different currencies. Anyone that has purchased anything on the internet has probably noticed that they have encountered currency exchange. Whenever a person buys something on the internet that is listed in a foreign currency, they must exchange their own currency to that particular foreign currency in order to make the transaction. Thus, this article will explain how this interesting process works.

Currency exchange rates change each and every day to reflect the different circumstances surrounding each currency on the market. If there was a huge political disaster that occurred in a particular country, then it’s currency will very likely become very cheap. This is because fewer people would want to purchase that foreign currency due to the turbulent political environment. Hence, it’s through various world events that the rates that you see every day change.
The rates are set by banks, usually large multi-national banks, that are the main facilitators of currency exchange. These banks often have large clients, usually other companies, that are looking to purchase huge amounts of foreign currency for purposes such as new investments. For the average person looking to exchange currency, they often won’t be able to utilise the services of these banks as they require large minimum amounts to be exchanged. For the average person, they will often have to utilise smaller exchange shops for currency exchange.

Although the average person doesn’t utilise directly the services of large banks for currency exchange, the exchange rate that they end up paying is usually derived from the rates that have been set by the bank. As banks are the largest players in the foreign exchange market, whatever rates that they set for each day will cascade throughout smaller players in the foreign exchange market. In fact, small exchange dealers often source their currency from large banks, stockpile them, then charge a higher margin to regular customers that aren’t able to utilise exchange services offered by banks.

The rates that are set by major banks are always changing as they often have analysts working all throughout the trading day to make adjustments to rates. You may have heard that there are lots of traders that work at these major banks. It’s the trader’s job, if they work on the foreign exchange desk, to set the rates by performing various buying and selling transactions throughout the day. Each and every minute these foreign currency traders are talking to parties that wish to buy or sell foreign currency, and they are negotiating rates that will allow the bank to make a profit. Whatever rate they choose will often influence other players in the forex market.

Hence, currency exchange involves a large number of different influencers. For the most part, exchange rates are set by the traders working at large multinational banking corporations. However, the rates that these traders set are reflective of actual events that are occurring throughout the global economy.