Currency Rates Make the Currencies Trade like any other Commodities in Forex

Currency rates are the rates of two currencies of different nations at which the currencies can be traded like any other commodities on foreign exchange market. Foreign exchange market is an international decentralized financial market in which currencies are traded at stipulated foreign exchange rates or international exchange rates. This market operates round the clock except the weekends and financial centers across the world serve as anchor points for the currency rates transactions. One of the major attraction towards foreign exchange market is its ability to yield huge money and therefore, its major purpose is to help investors and traders in earning handsome money on their foreign currency investment. It is this market where one currency gets converted into another at constantly fluctuating foreign exchange rates. For example, you are an Indian citizen doing business with an Australian company. Now, when you want to buy certain things from the Australian company, you need to pay money in the form of Australian dollars. The foreign exchange market also supports direct speculation in the value of currencies as well.

Describing the typical currency rates transaction, one buys a quantity of one currency by paying a quantity of another currency. The foreign exchange market as we know it today started forming during the 1970s after three decades of government restrictions on foreign exchange transactions. Before that, the Bretton Woods system of monetary management established the rules for commercial and financial relations among the world's major industrial states after World War II. During this time, that is during the Bretton Woods system, currency rates were fixed. However, after the World War II, the world realized the need to switch to the system of floating foreign exchange rates instead of that of fixed currency rates. The driving force of floating exchange rate is the rule of supply and demand. It is also dependent upon the amount of the currency that is held in foreign reserves. Floating international exchange rates are beneficial because economically they are more efficient and also they tend to be more volatile depending upon the value of the currency in question. On the other hand, any government may peg its currency to a certain amount in another currency or currency basket.

Pegged exchange rates are generally more stable, but, since they are set by government organizations, they have political connotations rather than economic well-being of the country and the world at large. For example, some countries peg their exchange rates artificially low with respect to a major trading partner to make their exports to that partner artificially cheap.

Following are some greatest benefits of trading in foreign exchange market:
(1) It has huge trading volume of currencies that are traded at constantly fluctuating currency rates
(2) Such huge trading volume leads to higher liquidity
(3) Its geographical dispersion
(4) It operates continuously except weekends
(5) It needs to be constantly aware of the global affairs as international exchange rates are affected by all the socio-economic and socio-political happenings around the world
(6) The low margins of relative profit compared with other markets of fixed income.

Jan ward is a Forex expert with a special focus on currency rates and the factors affecting international exchange rates.