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Participants in the exchange rate market

The foreign exchange market does not involve the ultimate suppliers and demanders of foreign exchange literally seeking each other out. If Martina decides to leave her home in Venezuela and take a trip in the United States, she does not need to find a U.S. citizen who is planning to take a vacation in Venezuela and arrange a person-to-person currency trade. Instead, the foreign exchange market works through financial institutions, and it operates on several levels.

Most people and firms who are exchanging a substantial quantity of currency go to a bank, and most banks provide foreign exchange as a service to customers. These banks (and a few other firms), known as dealers , then trade the foreign exchange. This is called the interbank market .

In the world economy, roughly 2,000 firms are foreign exchange dealers. The U.S. economy has less than 100 foreign exchange dealers, but the largest 12 or so dealers carry out more than half the total transactions. The foreign exchange market has no central location, but the major dealers keep a close watch on each other at all times.

The foreign exchange market is huge not because of the demands of tourists, firms, or even foreign direct investment, but instead because of portfolio investment and the actions of interlocking foreign exchange dealers. International tourism is a very large industry, involving about $1 trillion per year. Global exports are about 23% of global GDP; which is about $18 trillion per year. Foreign direct investment totaled about $1.5 trillion in the end of 2013. These quantities are dwarfed, however, by the $5.3 trillion per day being traded in foreign exchange markets. Most transactions in the foreign exchange market are for portfolio investment—relatively short-term movements of financial capital between currencies—and because of the actions of the large foreign exchange dealers as they constantly buy and sell with each other.

Strengthening and weakening currency

When the prices of most goods and services change, the price is said to “rise” or “fall.” For exchange rates, the terminology is different. When the exchange rate for a currency rises, so that the currency exchanges for more of other currencies, it is referred to as appreciating    or “strengthening.” When the exchange rate for a currency falls, so that a currency trades for less of other currencies, it is referred to as depreciating    or “weakening.”

To illustrate the use of these terms, consider the exchange rate between the U.S. dollar and the Canadian dollar since 1980, shown in [link] (a). The vertical axis in [link] (a) shows the price of $1 in U.S. currency, measured in terms of Canadian currency. Clearly, exchange rates can move up and down substantially. A U.S. dollar traded for $1.17 Canadian in 1980. The U.S. dollar appreciated or strengthened to $1.39 Canadian in 1986, depreciated or weakened to $1.15 Canadian in 1991, and then appreciated or strengthened to $1.60 Canadian by early in 2002, fell to roughly $1.20 Canadian in 2009, and then had a sharp spike up and decline in 2009 and 2010. The units in which exchange rates are measured can be confusing, because the exchange rate of the U.S. dollar is being measured using a different currency—the Canadian dollar. But exchange rates always measure the price of one unit of currency by using a different currency.

Questions & Answers

what is demand and supply
Lansana Reply
what is liquidity
VICTOR Reply
the ability to easily turn asset or investment to cash
Johnson
liquidity is refers to the ease with which an asset or security, can be converted into ready cash without affecting it's market price. example is milk and checking a account in the bank.
Gyamfua
the meaning PPP is public _private partnership and PPP in economic is purchasing power_parity.
Gyamfua
what is economy production
Miracle Reply
what is Monopoly
Miracle
what is monopoly
Aina Reply
what is the full meaning of gpa?
Eedris Reply
why the firm will be happy to make normal profit?
Anold Reply
1.to make further increase 2.to established the firm 3. to draw and attract more customers 4. to foresee the future of the firm. 5. to get goods in galore
Castino
when marginal utility is zero? what is the total utility?
Scott Reply
definition of choice?
Anick Reply
it refers to the act of selecting one alternative from the other
Donfack
State and explain three advantages and two disadvantages of capitalist economic system
Ghislain Reply
What is cross elasticity of demand
Justice Reply
Is a demand in which the of goods change over time.
Shadrick
How can I join
Shadrick
join what?
Castino
it measure the extend in which the quantity demanded of a good respond to change in price of other good.
Donfack
refers to sensitivity of quantity demanded in change of price of commodity
Daniel
meaning of PPP
OBANYI
What is balance of payments
Bah Reply
what are free good
Maillot Reply
how do you determine price change
Matri Reply
what is economics?
Yaya Reply
what is economic
Nana Reply
Economics is the study of how Individual consumer, institution and society as a whole uses its available finite resources to satisfy infinite needs and wants
Richard
Explain the following concepts using suitable exemple. 1) National budget. 2) National debt
Rosalie

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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