Welcome to Informationhood. Today, we will look into the world of foreign exchange, how currencies are exchanged, and how these rates affect the economy. Enjoy your reading!
Dollar to Naira – 360.00 (Feb 2018)
The Current World Exchange Rate
What Is an Exchange Rate?
An exchange rate is the price of one nation’s currency compared to another. It has two parts: the domestic currency and the foreign currency. Rates can be quoted directly or indirectly. In a direct quotation, the value of a foreign currency is expressed in terms of the local currency. In an indirect quotation, the domestic currency is priced in terms of the foreign currency.
Most exchange rates are quoted against the United States Dollar (USD). When two non-USD currencies are compared, the quote is called a cross-currency rate. In both direct and indirect quotes, there is always a base currency and a counter currency.
In direct quotations, the foreign currency acts as the base currency, while the domestic currency serves as the counter currency. Conversely, in indirect quotations, the domestic currency becomes the base currency and the foreign currency becomes the counter currency.
Although many currencies use the USD as the base, several Commonwealth currencies such as the British Pound, Australian Dollar, New Zealand Dollar and Euro follow different quoting standards. Most exchange rates are expressed to four decimal places, except the Japanese Yen, which is usually expressed to two.
Effects of Global Exchange Rates on the Economy
The use of exchange rates allows businesses to buy, sell, exchange and speculate on currencies. This activity takes place in the global foreign exchange (Forex) market, which includes banks, corporations, central banks, investment managers, retail brokers and private investors. Because of its size, the Forex market is considered the largest financial market in the world.
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The market attracts traders worldwide due to its liquidity and massive trading volume. Since exchange rates constantly change, it is crucial to check currency charts before making payments. Interbank or market rates serve as the official live conversion rates for any currency pair.
However, financial institutions often add up to five percent on top of the interbank rate when transferring money internationally, making transactions more expensive.
Major world currencies use a floating exchange rate. This means the rates are determined by market factors such as interest rates, inflation, political climate and the value of exported goods. The USD, GBP and EUR are key examples of currencies that follow this system.
Most Frequently Used Currencies
The United States Dollar (USD)
The United States Dollar, recognized by the symbols US$ or $, is the official currency of the United States and several of its territories. It is also the world’s most widely used currency in international transactions and remains the primary global reserve currency. Many countries use it as their official or de facto currency.
Apart from the United States, the USD is used in several British territories. The United States Central Bank, known as the Federal Reserve or “The Fed,” oversees its issuance and regulation.
The British Pound Sterling (GBP)
The British Pound Sterling is the official currency of the United Kingdom and several British Overseas Territories like South Georgia, the South Sandwich Islands and the British Antarctic Territory. Additionally, countries like Zimbabwe use the pound and peg it against the Falklands Pound, Gibraltar Pound, Saint Helenian Pound, Jersey Pound, Manx Pound, Scottish banknotes and Northern Ireland notes.
It is among the world’s most traded currencies, following the USD, Euro and Yen. Commonly nicknamed “quid,” the Pound Sterling has historically served as official currency in countries such as Australia, New Zealand and Canada.
And many other currencies also play major roles in global foreign exchange.
