A forex rate or a foreign exchange rate USD EUR can be defined as the rate at which one currency is exchanged for another currency. In this case, it is the rate at which the United States dollar is exchanged for the European Union currency. This means that a forex rate can be seen as the price of one currency (USD) in terms of another currency (EUR). An FX rate USD EUR is seen to be the ratio between two distinct currencies i.e. the USD and the EUR.
If the value of five hundred US dollar can buy a European goods worth five Euro, the dollar to euro conversion rate becomes 100 dollar = 1 euro respectively. A forex rate USD EUR is generally quoted in terms of Euro per unit of the foreign currencies and this means that all forex rates indicates an external purchasing power of the currency involved. Therefore, a fall in the purchasing power of the European Union currency or the external value of the Euro will consequently lead to a decrease in the foreign currency. In the same state, an increase in the European Union currency occurs when there is an increase in the forex rate. Therefore, if the external value of the European Union currency rises, it designates the strengthening of the currency while the fall in the external value of the European Union currency indicates a weakening of the currency.
THE DEMAND AND SUPPLY APPROACH FOR THE FOREX RATE USD EUR DETERMINATION
Every forex rate is viewed as a predetermined price therefore, the supply and demand condition of price theory is applied in the forex market for currency conversion. This simply means that the forex rate of every foreign exchange is directly equal to its supply. In the USD EUR currency pair where the domestic currency is the USD and the foreign currency is the EUR, the European Union currency is seen as the foreign exchange and the value of the US dollar in term of the Euro is seen as the forex rate.
In this case scenario, the value of one currency in terms of another currency is absolutely dependent on the demand for the supply of the foreign currency. Aside from this fact, foreign exchange rates are known to have floating characteristic. It is every changing and never static. This means that the value of currencies change in relation to each over time. For example, one United States dollar can be worth 0.69 Euros in the year 2013 but in 2016 one USD can be worth 0.72 Euro. This means that even if the US dollar increased in value, the Euro is still more valuable.
In conclusion, a lot of forex companies are generating an increased number of international bonds which means that currency changes and floatation have the tendency of affecting various forex market investing power drastically. With this, forex traders needs to be prepared and know how their investments will change with variations in currencies.
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.