How Forex Works
The foreign exchange market (Forex trading) is an international marketplace for buying and selling currencies. With a value of $6.6 trillion, it is 25 times larger than all stock markets combined.
Forex trading is governed by flexible currency exchange rates. As a result, prices for currencies most likely to be used by Americans are constantly changing. These currencies include the Mexican Peso, Canadian Dollar, Euro, British Pound, and Japanese Yen.
Types of Trading
There are four ways to participate in Forex trading: spot contracts, swaps, futures contracts, and options. Spot contracts account for half of all trades made, while spot deals make up 30% of total trades. Futures contracts account for 15%, while options only make up 5% of total trades.
Impact of Forex on Dollar Value
Forex trading directly affects the value of the dollar. When traders demand a higher price for the dollar, its value increases. This often happens when traders perceive that other countries pose a greater risk. The dollar becomes a safe-haven currency if it seems that the value of foreign currencies will decline.
Impact of Forex on the Economy
A strong dollar makes American exports less competitive. Their goods will appear expensive to foreigners. For this reason, a strong dollar can slow economic growth.
A strong currency also leads to a drop in the stock market. Foreigners will think American stocks are more expensive compared to local stocks when the dollar is strong.
On the other hand, imports will be cheaper. This will lower the cost of most consumer goods since many of them are imported. Inflation becomes a lesser threat when prices decrease.
Source: https://www.thebalancemoney.com/what-is-forex-trading-3306253
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