Trading Academy

Lesson 17

How are currency prices determined

The same laws of supply and demand that apply to all other commodities apply to currencies as well. More demand for a certain currency will cause its valuation to go up against other currencies. When individuals and institutions do not want to hold a country’s currency, the value will go down.

Example: If the global demand for euros increases, then the euro will appreciate against the other currencies.

Currency prices are also known as spot exchange rates. This is the rate at which currencies can be exchanged for value spot, and it is the most actively traded, market-determined price at which a particular currency pair can be exchanged.

The total Forex volume is transacted through about 10 of the world’s largest banks. They are in charge of making prices for the bank’s clients and for offsetting risk with other banks. 

The sum total of all banks selling dollars and all banks buying dollars creates a supply and demand for U.S. dollars. This comprises the interbank system, which is responsible for the creation and fluctuation of currency prices.

Bank dealers arrive at a specific valuation for a currency based upon a variety of factors including the current market rate, how much volume is available at that specific price level, their opinion on where the currency is headed next, and their inventory positions.

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