The fall of the dollar

The steady and orderly decline of the dollar from early 2002 to early 2007 against the euro, Australian dollar, Sterling Pound, Canadian dollar and a few other currencies (ie, its trade-weighted average, which is what counts for purposes of trade adjustment) , remains significant.

In the wake of the sub-prime mortgage crises in the US, dollar losses escalated and continued to feel the backlash. The Fed responded with several rounds of rate hikes while weighing the balance of domestic growth and inflation fears.

Basic theories underlying the dollar to euro exchange rate:

Law of One Price: In competitive markets free of transportation cost barriers to trade, identical products sold in different countries must sell at the same price when the prices are stated in terms of the same currency.

Interest rate effects: If capital is allowed to flow freely, exchange rates become stable at a point where equality of interest is established.

The dual forces of supply and demand determine euro vs. dollar exchange rates. Various factors affect these two forces, which in turn affect the exchange rates:

The business environment: Positive indications (in terms of government policy, competitive advantages, market size, etc.) Increase the demand for the currency, as more and more enterprises want to invest there.

The Euro-US Dollar Currency Exchange

This article provides an overview of the factors affecting the leading currency pair: euro-dollar exchange commonly referred to as EUR / USD.

The euro-dollar exchange rate is the price at which the world demand for US dollars equals the world supply of euros. Regardless of geographical origin, a rise in the world demand for euros leads to an appreciation of the euro.

Factors affecting exchange rates

Four factors are identified as fundamental determinants of the real euro to dollar exchange rate:
• The international real interest rate differential
• Relative prices in the traded and non-traded goods sectors
• The real oil price, precious metals and other commodities.
• The relative fiscal position
The nominal bilateral dollar to euro exchange is the exchange rate that attracts the most attention. Despite the comparative importance of euro to US dollar bilateral trade links, trade with the UK is, to some extent, more important for the Euro zone than is trade with the US. The dollar and the euro have a strong predisposition to run together in the very short term, but sometimes there can be significant discrepancies. The very strong appreciation of the dollar against the euro in 2003 is one example of these discrepancies.

In the long run, the correlations between the bilateral dollar to euro exchange rate, and different measures of the effective exchange rate of Euroland, have been rather high, especially if one looks at the effective real exchange rate. As inflation is at very similar levels in the US and the Euro area, there is no need to adjust the dollar to euro rate for inflation differentials, but because the Euro zone also trades intensively with countries that have relatively high inflation rates (eg some countries in Central and Eastern Europe, Turkey, etc.), it is more important to downplay nominal exchange rate measures by looking at relative price and cost developments.

Exotic Currency Trading

What is exotic currency?

Exotic currency is currency that is not common in the foreign exchange market. Exotic currency is usually from developing countries such as parts of Asia, the Pacific, the Middle East and Africa.

It is not as easy to trade exotic currency because the market does not have the same amount of activity for exotic currency as it does for main currencies. The main currencies include 'majors' and 'minors'.

Major currencies are the ones most commonly traded. They include the United States dollar (USD), the euro (EUR), the Japanese yen (JPY), the British pound sterling (GBP), and the Swiss franc (CHF). Some groups also include the Australian dollar (AUD) as a major currency, though it is often considered a minor. Minor currencies also include the Canadian dollar (CAD) and the New Zealand dollar (NZD).

Exotic currencies are neither major nor minor, but they are still important in the Forex market.

What makes exotic currency trading different?

Exotic currency trading is different from trading in major currencies because of the level of interest in exotic currencies in the market. The relative lack of activity in the exotic currency market means the currencies can have a high cost and can carry a high risk.

High risk creates opportunities for high profits. But the exotic currency market is not easy to understand completely. It is not secure. The political and financial environments in developing countries may change quickly and cause the country's currency to rise or fall in value.

Exotic currency rates

Exotic currency rates have bigger spreads than the main currencies. So, it is important to trade exotic currency with care and take into account the higher spread when calculating the potential profit. The spread represents the difference between what the market maker gives to buy from a trader, and what the market maker takes to sell to a trader.

Cross rates

Most currencies are traded against the US dollar in a currency pair. Any quote that is not against the US dollar is called a 'cross quote'. An example is GBP / JPY (British pounds / Japanese yen).

The quote is made by measuring the British pound against the US dollar, then the Japanese yen against the US dollar.

The result is a cross quote:

GBP / USD = 1.7464
USD / JPY = 112.29
So the cross quote is: GBP / JPY = 1.7464 x 112.29 = 196.10
This means that one British pound is worth 196.10 Japanese yen.

Buy and sell currency

Traders in the foreign exchange market buy and sell currency to try to make profit. There are two prices for currency: the buy price, called the 'BID'; and the sell price, called the 'ASK'.

The difference between the 'bid' and the 'ask' is called the 'spread'. The spread represents the difference between what the market maker gives to buy from a trader, and what the market maker takes to sell to a trader.

For example: the EUR / USD bid / ask rate is 1.2100/1.2200. The market maker gives $ 1.21 when buying from the trader, but takes $ 1.22 when selling to the trader. If traders buy and sell immediately without any change in the exchange rate, they lose money. This happens because of the spread - traders pay more to buy the currency than they receive when they sell in that one moment.

In fact, the spread is the leading source of income for the market maker. Like any other market, the merchant will buy at one price and sell at a higher price.

Quotes

The price of a currency is called the 'quote'. There are two forms of quotes in the Forex market: direct quotes, and indirect quotes.

A direct quote is the price for one US dollar in terms of another currency.

An indirect quote is the price for one UNIT of another currency in terms of the US dollar.

Please note: in general, most currencies are quoted against the USD (eg - "direct quote").

But, the EUR, GBP, AUD, NZD (as well as Gold XAU and silver XAG) are indirect quoted, for example: GBP / USD.

The quote is the price to a currency pair that the deal will be made with. This is unlike an 'indication', where the price given by a market maker is only informational (for trader's knowledge, rather than for execution). Real time quotes are provided to Easy-Forex ® logged in users. Delayed quotes ('indication') are provided to the rest of the site users.

The exchange rate

The exchange rate is always changing. The value of one currency is determined by market supply and demand forces, by comparing it to another currency. In a currency pair, the first currency is called the 'base currency'; the second currency is called the 'quote currency' or 'counter currency'.

When you buy a currency pair, you buy the base currency and sell the quote currency. The exchange rate tells buyers how much of the quote currency they need to buy one of the base currency. The order in a pair always stays the same, being a common approach by the industry. USD / JPY, for example, is a pair (USD = base, JPY = the quote). The order within the pair, in the way you use the term, does not change. So you either BUY it or SELL it, depending on the direction of the trade. For example: USD / JPY - you either BUY JPY using USD or you Sell JPY to get USD. On the currency rate table on the Easy-Forex ® website you can view the way in which each pair available for trade is ordered.

Here is an example: EUR / USD 1.2500 means you need 1.25USD to buy one euro. It also means if you sell one euro you get 1.25USD. All trades involve buying one currency and selling another currency at the same time. If in the next day the Euro is rising against the USD and the exchange rate is now 1.26, for every 1 Euro that you bought, you have earned 1USD cent. Or, if you traded the opposite direction, for every EUR that you sold (at 1.25) you lost 1USD cent (since you "buy" back the EUR for 1.26).

Currency Pairs

What are currency pairs?

In the foreign exchange market, currency is traded in pairs. Pairs have meaning in relation to each other so must always stay together.

The two currencies in a pair are traded one against the other. The rate at which they are traded is called the exchange rate. The exchange rate is affected by currency supply and demand.

Most common currencies

The most common currencies traded in the market are called 'majors'. Most currencies are traded against the United States dollar (USD). USD is traded more than any other currency. The five currencies most traded next are: the euro (EUR); the Japanese yen (JPY); the British pound sterling (GBP); the Swiss franc (CHF), and the Australian dollar (AUD). Trades of the six major currencies total 90% of the market.

The most common currency pair is EUR / USD.

Online Trading Guide

Online trading definition is a basic understanding of online trading processes. Since the invention of Internet people have beena able to do practically everything virtually. Due to the Internet online trading has become one of the most popular ways to trade as far as stock trading turned out to be as available to independent investors as possible. Online trading gives both beginners who've just had a single day trading course and advanced traders an opportunity to trade stocks, options, forex and futures all over the world without physical presence of a broker and with much lower commissions, because everything is done online .

Stock online trading is based on buying and selling stocks. Today stock online trading is the most popular method to trade owing to computers, because information on stocks was available only to brokers and you had to call a broker and pay brokerages for buying or selling stocks and now this information is widely available. Since this modifications occurred traders can control their investments with the help of Internet.

Stock option online trading is based on buying and selling options and very perspective financial products. This system gives traders a perfect chance to control and protect their stocks and generate their investment benefits as far as an option is an agreement to buy or to sell certain financial product. The main idea of stock option online trading is that an option you buy has its fixed price and time limitation.

Forex online trading is another speculative online business based on buying and selling foreign exchange, gaining profits due to rise and fall of currency rate, namely on the difference between the currency pairs price.

Futures online trading is another kind of online trading which is based on buying and selling financial products (commodities, labour, currency) by means of futures contracts. Such contract specifies a particular date (delivery date or final settlement date) in the future when a certain financial product should be bought or sold and this product's price.

Speaking about online trading it's necessary to say about safe online trading. It's obvious that in order to trade online you'll have to open your online account and choose online trading software. When you choose a certain website for your future account, you should search for information about a company you are going to fix upon and make sure that it has a trustworthy reputation. The same refers to choosing online trading software, platform and online trading portal.

In conclusion it's necessary to say that online trading is a perfect opportunity to trade and earn money but still it's obvious that online trading is not for everyone. That's why before you start trading, you should find out more about online trading pros and cons, online trading concepts and of course about online trading tips. Knowledge is a main key for your successful online trading, don't ever identify online trading with gambling because the results of such approach can be disastrous.

Ensure your finances are structured accordingly before you hit the trading floors online ... If debt free advice is required ... ensure you seek quality advice.