There are a number of deciding factors for determining the price of a particular currency. The most important factors are the political and economic conditions in the country that issues the currency. Many things like the political stability, interest rates, and inflation will all affect the price of a currency. In some cases the issuing government will attempt to control the price of the currency by either flooding the market to lower the price or buying up the currency to increase the price.
However the market volume in the FOREX exchange is so immense it is impossible for any single factor to control the price of a currency for any length of time. In the long run the natural market will control the price of the currency. This is part of what makes the FOREX exchange one of the most open and level markets to invest in.
Three letter codes are used to identify all currencies in for quoting purposes. There are seven major currencies in the current FOREX market and they are: EUR (European euros), GBP (United Kingdom pounds), USD (US Dollars), AUD (Australian dollars), JPY (Japanese Yen), CHF (Swiss francs), and CAD (Canadian dollars).
Quotes display the price by indicating a price and a pair of currencies. The base currency is the first one indicated and the quote currency is the second one.
For example USD/EUR = 0.8259
The pair of currencies is the US Dollar and the European euro. The first currency is always considered to be at 1 and the second currency shows how much it would cost to purchase one unit of the first currency with the second one. In this case purchasing one US dollar would cost 0.8259 euros.
For another example EUR/USD = 1.2474
In this case we see that it will cost $1.2474 US dollars to purchase a single euro.
As the quote price raises it indicates that the base or first currency is growing stronger. This means that a single unit of the base currency is able to purchase more of the quote currency. On the other hand if the quote price falls then this indicates that the base currency it growing weaker and a single unit will purchase less of the quote currency.
When you see a FOREX quote it will be given as and ask and bid price. When the buyer is selling the quote currency then the bid price is what they will pay to purchase the base currency. When a seller is selling the base currency to buy the quote currency then the ask price is what they will pay.
The following example shows a quote with bid and ask price.
Symbol Bid Ask
USD/CAD 1.2456 1.2501
This tells us the following: We can purchase one US dollar for 1.2501 Canadian dollars or conversely we can sell one US dollar for 1.2456 The most commonly traded pairs of currency are known as the Majors. They are: EUR/USD, GBP/USD, AUD/USD, USD/CAD, USD/CHF, and USD/JPY.
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Written By: Steve Welker
