Understanding The Process of Exchanging One Currency To Another


If you have traveled to other countries, you certainly had some experience of changing a currency to another for travel expenses. You may not notice it but you just got involved in the Forex market. But if you really want to take part in the Forex market, you can do Forex trading through a MetaTrader 4 trading platform. Other than that, it is important that you know the basics of trading and the currencies being traded in the market as well.

Understanding the Currencies

The national currencies play a very important role in the modern economy that we have nowadays. It consistently helps us in expressing the value of a particular item found across the border of another country. Exchange rates are highly needed because a nation’s currency may not be accepted by another country. You can buy a loaf of bread in Japan using USD. If you want to buy the bread, you first need to go to some bank, buy some Japanese yen with the USD that you have. That is when you’ll be introduced to the exchange rate of USD to the Japanese yen.

Different Methods of Exchange

There are two different methods of exchange in determining the exchange rate of a currency – the pegged currency and the floating currency.

The Floating Exchange Rate

It is the market that determines the rate of the floating exchange. To say it simply, a currency will be worth whatever the amount the buyer will willingly pay. This is particularly identified according to the supply and demand of the products and services tied to that particular currency. The supply and demand are driven particularly by economic factors like inflation, import, and export as well as foreign investments.

The Pegged Exchanged Rate

Also known as a fixed system, the pegged exchange rate is maintained by the country’s government. When this currency is pegged into another country, particularly the U.S. dollar, the exchange rate will not move constantly, every day. It is the government that needs to keep an eye on its pegged rate to make it stable. The national banks of these countries need to hold huge reserves of a certain foreign currency that will help mitigate the supply and demand. If there comes a time and a sudden demand for currency comes along, the national bank of that country will readily release a certain amount of that currency to meet the demand of the public.

The Euro

Euro/United States Dollar (EUR/USD) is one of the major currency pairs that you can trade in the MetaTrader 4 trading platform. These currencies are from two of the largest currencies in the world. As for the Euro, it is the largest currency event in all of history. To date, 16 other currencies were removed and were replaced by Euro.

Even though the euro plays a significant role in enhancing political solidarity. It also has a major role in unifying the different economies of countries that are using it. Other than the economic aspect, it also helped in jobs as it has increased cross-border employment.

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