How Much Was 1 Yen Worth In The Old Days Forex Basics – An Exchange Rates Tutorial

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Forex Basics – An Exchange Rates Tutorial

Profits are generated due to exchange rate fluctuations in the foreign exchange or “Forex” market. This fact may seem common knowledge, but the determination of exchange rates should not be taken for granted.

In fact, there is a very rich history behind the concept of the exchange rate, and it is important to understand why things turned out the way they did – and how you can put that knowledge to good use.

This quick tutorial on exchange rates will help you do just that.

First, let’s look at the simplest definition of exchange rate. The exchange rate is the relative value of one currency to another. If one US dollar is worth 1.20 Canadian dollars, the exchange rate is 1:1.2 or 1.2 for the CAD/USD currency pair.

But what does this really mean? Why is one currency worth more than another and who decides?

If you look back to the earlier part of the 20th century, you will remember that most of the world’s currencies were dominated by precious metals such as silver and gold.

In the past, the United States followed the “gold standard”, which “pegged” the dollar to the price of 1 ounce of gold. All other currencies were then pegged to the dollar and allowed to swing in either direction with a margin of up to 1 percent.

This type of exchange rate, although minor fluctuations were allowed, was considered a “fixed exchange rate”.

Now, fast forward to the second half of the century and you will find the “gold standard” discarded along with the fixed exchange rate model. Instead, the foreign exchange market currently operates mainly on a “fluctuating exchange rate”.

Fluctuating exchange rates are governed by the market forces of supply and demand. If demand for a currency exceeds supply, the exchange rate (and value) of that currency will rise.

Similarly, if the supply of a currency exceeds the market demand, the value (and exchange rate) of that currency will decrease.

We see this happening to the US dollar today. In order to keep up with government spending, the Federal Reserve prints more and more dollars and then sells them as “debt” to other countries.

The market forces that used to give the dollar its strength, such as oil exports and US dollar-denominated oil transactions, are eroding. Thus, not only do we find the exchange rate of the dollar weakened, but also the exchange rates of many of our closest trading partners.

The Japanese yen, for example, fell even more than the dollar. Part of this is the general collapse of the Asian market, but it also has to do with the fact that much of Japan’s economic growth at the end of the last century depended on exports to the United States.

This is just one example of how market forces affect exchange rates, but it is useful for examining some of the factors behind exchange rate fluctuations.

If you want a real forex tutorial, I recommend opening a demo trading account with an online broker. Do test trades to get a feel for things and note the current rates.

Then be sure to keep up with world and financial news and see if you can spot the connection between major announcements and price movements!

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