Forex exchange rate show the relationship between two currencies

Forex exchange rate is the value of two currencies relative to each other. This relationship is usually expressed as the amount of one currency required to buy a unit of another currency.

For instance, if on a particular day one US dollar can buy 110 Japanese yens then the foreign exchange rate for the two currencies would be 1:110. This equation is also known as pairing. The pairing can be reversed to indicate how many US dollars a single unit of Japanese yen can buy.

Another term that is used to denote foreign exchange is cross rates. In this, the US dollar does not figure and the value is expressed as the relationship between two foreign currencies.

Forex rates are calculated up to four decimal points, which are referred to as pips or basis points. These are used to indicate the positive or negative movement of foreign exchange. For instance, if you exchange euros with yen at 135.1030 and then the euro exchange rate goes up to 135.1035, then this is referred to as a five pip improvement in exchange rate.

The forex operates on a bid/ask price basis. Since foreign exchange transactions require transactions of two currencies, the forex rates are quoted as 'two tier' rates. For example, USD/JPY at 110.00/10 indicates that a trader is prepared to buy yen at 110 and sell at 110.10. If this trade is made, the trader will secure a 10 pip "spread", the difference between the buying and selling price.

This spread between currencies depends on market conditions and traders’ instinct about the strength of a currency on a particular day. Only licensed forex traders have access to officially quoted forex rates. Small investors or day traders acquire their currency from a commercial bank at a less favourable rate.

The foreign exchange market thrives because there are buyers and sellers willing to trade on a cash-only basis. The market highs and lows are determined solely by the demand and supply of currencies. That is why forex rates are independent. They cannot be decided by banks or individual governments.

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