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What is Forex?

Malcolm Tatum
Updated Feb 21, 2024
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Forex, which is an abbreviation for the phrase “foreign exchange,” has to do with the accurate and timely calculation of the rate of exchange between any two national currencies. Forex impacts the lives of a number of persons daily. Here are a few examples of how forex works in various scenarios.

Because so many different factors impact the worth of the currency of any country, having a more or less stable procedure for evaluating the current worth of one currency to another allows commerce to continue uninterrupted on a global scale. For example, a country that is going through a period where it is importing more than it is exporting may see the value of its currency, and thus the forex rate, suffer on the world market. At the same time, the election or appointment of new governmental figures can either enhance or dilute the worth of a country’s currency in comparison to other countries, based on how those new government officials are perceived by the world community. Natural disasters are another example of a condition that can impact the value of currency as determine by the foreign exchange rate. Simply put, a country that sustains major damage to its exported goods and services will see their currency decrease in value in comparison to other countries.

The balance of trade between any two countries can also have an impact on the rate of exchange between two countries. Ideally, the trade balance will consistently remain within a range that is acceptable to the two countries. This would result in a forex rate that would only vary slightly from one period to the next. Sudden changes in the balance of trade would result in a marked change in the forex rate, which may be good for one of the countries, but not for both.

How does forex impact the individual? The current foreign exchange rate will have an immediate impact on anyone who travels to another country for business or pleasure. Based on the current rate of exchange, one may find that the travel funds will buy more or buy less in the way of goods and services. At the same time, an individual does not have to leave his or her home country to experience the effects of a substantial chance in the foreign exchange rate. Goods and services that are supplied by foreign vendors will suddenly cost more, because of the change to the forex rate, leaving the consumer to make up the difference in cost by adjusting the home budget accordingly.

Forex changes can be positive or negative for any given country and its citizens, depending on the circumstances. One important factor to note is that forex is in a constant state of flux, which means that if you are not happy with the rate of exchange today, you can anticipate some difference in the forex a month from now.

WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Malcolm Tatum
By Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing to become a full-time freelance writer. He has contributed articles to a variety of print and online publications, including WiseGeek, and his work has also been featured in poetry collections, devotional anthologies, and newspapers. When not writing, Malcolm enjoys collecting vinyl records, following minor league baseball, and cycling.
Discussion Comments
By parmnparsley — On Jun 01, 2010

Babalaas - My advice would be to read up on, or take courses in, finances, economics, and international business. These areas will give you a good understanding of the history of currency exchange markets, the gold standard and its lasting effects on reserve currencies, and reasons that organizations and individuals invest in foreign currencies and euro dollars. I have learned a lot from studying these subjects. Now to answer your first question, Forex markets are influenced both directly and indirectly by cultural, economic, political, legal and environmental forces. The economic crisis in Greece is a good example of how multiple contributing forces have caused people to lose confidence in the European Union and ultimately the Euro. The end result is a steep devaluation in the Euro.

By Babalaas — On Jun 01, 2010

What factors impact the foreign exchange markets and changes in currency valuation? I always see all of the advertisements about investing in foreign exchange markets, and I am curious to know what people look for to tip them off on when to buy and sell a certain currency. I have been thinking about trying my hand at Forex trading, but right now I need to learn more about Forex markets. Honestly, they are still somewhat of a mystery to me. Where should I begin?

Malcolm Tatum
Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing...
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