Understanding the Currency Exchange Market

Tuesday, November 20, 2018, 12:00 PM | Leave Comment

What is a Currency Exchange?

The currency exchange market is a financial institution with the right to exchange one currency for another currency for its customers. A currency exchange can be a sole business or service offered through a bank or financial institution.

The profit made from the currency exchange is through the services offered by adjusting the exchange rate or a commission.

Currency exchange is often referred to as the foreign exchange market. While acknowledgment goes to the U.S dollar, the euro and Iraqi Dinar are two fast-growing currencies that are being traded.

  • The Pros, Cons, and Inner Workings of the Currency Exchange

    Currency exchanges are often seen at airports when travelers are purchasing currency for their destination or if they are exchanging an excess amount of money to their native currency when returning.

    Many travelers are going cashless and a few banks are offering cards that can accept several different currencies with little or no fees. For those with international banks, having an offshore ATM is an option.

    • Pros

      Size: The currency exchange market has advantages on its side because of its size. Due to the millions of participants providing liquidity, currencies are easily bought or sold. Consumer orders can be filled immediately. The market size creates a balance which prevents any sole entity from gaining too much control. A large advantage to currency exchange is that the central banks are associated with the market, which create a short-term influence in the market world.

      Ease of Access: The market is open 24 hours a day and five days a week. Many brokers utilizing the market are available on weekends. This means consumers have the flexibility to access and trade when they want. The great thing about many brokers is that they require low opening deposits, provide low transaction costs, and usually charge just the bid-ask share per trade. This is the difference between the buying and selling price of a share. This is another form of currency exchange. It can be for trading currencies for profit, just as for exchange to travel.

      Trading-friendly: The exchange market serves a variety of trading styles. Investors exchange within the market without restrictions. Participants in the currency market use exchange-traded options to their advantage or directly through a broker. Therefore, different investments can be an option.

    • Cons

      Unstable Regulations: Regulations are important when investments or exchanging is being made. The market does not have a central exchange, so it is not as strictly regulated as others. This creates a great risk of mispricing.

      Broker Risk: With little central exchange control, online brokers cause concern for the potential for fraud. The sad truth is that research has to be done beforehand. Say a broker goes bankrupt. The funds that are usually deposited are not under any exchange protection. If a broker is not able to manage trades due to an outage, then the investor is at risk.

      Potential Loss: When money is involved there is always a risk of loss. The Currency Exchange Market is no different. When trading more money, potential loss on the market is inevitable. Because currency prices can change on a whim due to different factors, the reports can be daunting when viewing the risk ratio.

      The dollar is still up.

      There is a half and half view of the dollar and how it rules the world. Several market experts say that the U.S dollar is tracking behind, but it is a universal currency. Almost all countries have a multinational need for physical money and understand its impact. For instance, if oil is being drilled in Nigeria, the U.S dollar is often the currency exchanged for payment. The dollar goes for around 63 percent of central bank holdings with the euro not too far behind at 20 percent, despite the U.S. economy being smaller in retrospect to euro.

  • Other currencies that are gaining strength

    180 currencies are trailing in today’s society and each has a different value. There are currencies that are higher than the euro or pound and closing in on the U.S dollar.

    Here are the top 9 currencies in the world gaining strength in descending order.

    9. Swiss Franc Swiss franc (shortened to CHF) Switzerland and Liechtenstein

    8. Cayman Islands dollar

    7. Euro

    6. Gibraltar Pound (GIP)

    5. British Pound (GBP)

    4. Jordanian Dinar

    3. Omani Rial

    2. Bahraini Dinar

    1. Iraqi Dinar

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