Skip to content

Bitcoin | Commodities | ETFs & Mutual Funds | Ethereum | M&As

Foreign Exchange Market

The Foreign Exchange Market or Forex, is a decentralized global marketplace where currencies are bought, sold, exchanged, and speculated upon. It is the largest and most liquid financial market in the world, with a daily trading volume of trillions of dollars. 

Currencies are traded in pairs, such as EUR/USD (Euro/US Dollar), GBP/JPY (British Pound/Japanese Yen), and USD/JPY (US Dollar/Japanese Yen). The first currency in the pair is known as the base currency, and the second currency is the quote currency. The exchange rate represents the price at which one currency can be exchanged for another. 

EUR/USD chart August 30'22 to August 30'23

To visualize this better we went on TradingView and looked at the EUR/USD chart starting last year around this time. We drew a dark line at $1 so you can see when the USD performed better than the Euro and vice versa. 

One major reason for the Euro’s decline in 2022 is the losses it suffered against the US dollar in the aftermath of Russia’s invasion of Ukraine and the energy crisis that it unleashed. The euro also suffered because of the European Central Bank’s initial reluctance to raise interest rates. As a result, key rates in the eurozone fell well below those in the U.S., where the Fed got off the blocks earlier with aggressive hikes. Plus, higher yields in the U.S. attracted foreign investors, boosting the dollar.

Looking at the chart, it clearly shows that between mid-August and mid-November of 2022, the Dollar was worth more than the Euro. However, the Euro recouped much of the losses and gained strength. On August 30’23, 1€ buys $1.09. So, if going to a store in a European country that uses the Euro, and an item is priced at 1€, that’s the equivalent of $1 and 9 cents. Get it? Sweet, let’s look at some other things.

Why are currencies worth more than others?
Exchange rates are influenced by a multitude of factors, including economic indicators (GDP, inflation, employment data), interest rates, geopolitical events, market sentiment, and more. Just like other investments, currency values fluctuate based on the supply and demand dynamics of the market. 

If countries in the Eurozone outperform the U.S. economy, investors may be more inclined to buy Euros, increasing its demand and, consequently, its value relative to the US Dollar. Since investors believe that this example remains true, the Euro will continue outperforming the USD. However, as seen in the example above, Eurozone countries were facing a critical situation and are still not off the hook. That’s what investors are speculating on now.

Since we got many different currencies in the world, investors look at their economies, compare GDP’s and current news and activities within those zones. It is therefore very important to stay on top of economical news, view the stages of recessions, and more.

Big players

The strongest currency in the world per base unit (on August 30’23) is the Kuwaiti Dinar. 1 KD buys $3.23 on August 30’23. 

Kuwait is located on the Persian Gulf between Saudi Arabia and Iraq, and the country earns much of its wealth as a leading global exporter of oil. 

The second strongest currency in the world is the Bahraini Dinar. 1 BD buys $2.64 on August 30’23.

According to fxopen.com, the most stable currency in the world is the Swiss Franc thanks to its stable political environment and strong economy. On August 30’23, 1 CHF buys $1.13.

KWD/USD chart August 30'22 to August 30'23

What to know
We learned that there are many different currencies in the world that have different values. So, if you live in America and want to go to a Eurozone country, more money will be needed since the USD is currently weaker than the Euro. 

Various participants engage in the forex market, including central banks, commercial banks, financial institutions, corporations, governments, hedge funds, and individual retail traders. Forex trading often involves the use of leverage, allowing traders to control larger positions than their initial capital. However, leverage also increases the level of risk, and significant losses can occur if the market moves against a trader’s position.

Disclaimer: This content is for informational purposes only and is not intended as financial advice. We try to provide accurate information on personal finance and investing, but it may not apply directly to your individual situation. We are not financial advisors and we recommend you consult with a financial professional before making any serious financial decisions. There are risks associated with any investment which include but are not limited to stocks, bonds, currencies, cryptocurrencies, as well as any other market or investment vehicle. For more Terms, click here.