What Is Meant by Foreign Exchange Rate?

We’ve discussed managing your foreign exchange risk when you’re making international transactions. But what is meant by foreign exchange rate?

Foreign exchange rate refers to how much of one currency can be purchased with another currency. For example, if you have euros (EUR) and want to buy U.S. dollars (USD), the exchange rate is how much EUR it takes to buy a USD at a particular moment. Currencies are exchanged on the foreign exchange market, a global marketplace that is open 24/7. 

How does the market move?

Currencies are exchanged in pairs—such as EUR and USD, USD and Mexican pesos (MXN), and so on. The exchange of currencies on the market is what sets the price of each currency. 

Most currencies float on the foreign exchange market, with the value rising and falling based on market supply and demand. Currencies can also be pegged to the value of another currency, such as the Panamanian Balboa (PAB), which is pegged to the USD and matches its value as the USD rises or falls on the FX market.

How do you read the market?

To protect your business against exchange rate risk, you need to know what the market is doing. Are rates moving up or down? How much and how fast are rates moving? How volatile is the market—are rates moving in a predictable manner, or are they behaving in an unpredictable way?  

Really understanding what the market is doing today, and where it’s likely to go tomorrow, takes a combination of experience and market analysis. Market analysis is a way of looking at the overall market, seeing where it’s been, and looking at what’s happened around the world that may affect the market. Experts then use the insight they gain from market analysis to forecast where the market might go in the future.

The two main methods we use at Monex to forecast FX exposure are: 

Technical or Chartist Forecasting – is a traditional method of forecasting that you may have learned in economics class. Technical forecasting uses historical data to pinpoint patterns and cycles in the foreign exchange market. These patterns are then used to estimate what will happen in the future.  

Economic or Fundamental Forecasting – this forecasting method takes a currency pair and examines the individual monetary policies of the currencies’ home countries. It looks at the relationship between two countries and how their monetary policies affect the currencies and estimates how that may affect them in the future.  

Get top FX market forecasting from the experts

Market forecasting takes a lot of knowledge and experience. Most businesses don’t have the time or resources in-house to get good insight into where the market is heading. Yet without good forecasting, you’re at the mercy of the foreign exchange market’s volatility.

You can protect your assets from foreign exchange rate risk and get the best market forecasting possible by working with the experts at Monex USA.

Monex USA (formerly Tempus) has more than 30 years of FX experience across every industry. Our team of over 2,700 foreign currency exchange experts serves more than 70,000 clients around the globe. Monex consistently earns top forecasting awards from both Bloomberg and Reuters for the G10 currencies, besting more than 70 financial institutions, including the largest global banks. 

With Monex on your side, you’re able to keep more of your hard-earned profits and protect your business from foreign exchange rate risk. Contact us today to see how we can help you with FX market analysis and forecasting.

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