Why the world need foreign exchange?

Hi all, this is unrelated question about trading. i wanted to know why the world need foreign exchange market? i know basically if japan sells his car to USA, then there is need for an exchange. but i hope someone can give a detailed explaination why the world need foreign exchange market?

please advice.

That's all the explanation, really.

But the story is a little longer. You need to know why we need money.
Well, we need money to measure value of things. Let's say you are a farmer making vegetables and I am a craftsman making tools. I need to eat tomatoes from your farm to live. You need some tools from me to cultivate your tomatoes and make a living. But to exchange one tomato for one tool wouldn't be fair. We have different costs of making these goods. So this is how money appear. Instead of exchanging the products themselves, we exchange products for money, so that each product's value is measured and converting the products you make into products you need is much easier.

Now why do we need foreign exchange market (or currency market)?
It's simple. The cost of a product can differ from country to country. In Ecuador bananas probably are very cheap, because anybody can grow them. In Sweden on the other part, where bananas aren't growing, they are more expensive. So when buying bananas, one currency unit in Sweden will have a different value than in Ecuador. But bananas aren't the only good available. We sell cars nowadays, machines, clothes or services. These things need to get balanced. Some make more than they use, so they export, others make less, so they import. Some have natural resources, some don't.

We not only need to know the value of different products in a specific place, but the value of products in different places around the world.

The currency market measures the value of a currency by comparing it to an other one - this being the currency pair you're trading every day, EUR/USD for example.
Now, the currency itself measures the value of different products.
What do you get from these two statements? The FOREX market measures the value of products all around the world. That's how we can sell and buy anything from anywhere.

If we would have the single currency all in the world, then we wouldnt need forex...because each country has its own politics or several together, and each of the country has its own incomes and outcomes etc, so why should the euro or the dolar pay for something bad going on in lets say australia...

but its also got a lot to do with the capitalism, since in comunist country they dont got forex or exchanges,...and the point of capitalism is the growth and personal property not national, ...and companies or corporations need credits to pay to workers, so thats why they go to stock exchanges if they grow so big, and seek some investment capital for their current or future bussiness, to expand...etc, and here we meet with forex, since each stocks has its own currency for trading only if not from the same country,....but the forex is needed to hedge against the risk of trading between 2 bussiness from other nations as weell as banks might hedge if u take a credit for your house in yens, they will hedge 100k eur--> buy EUR sell jpy.....(even if russians or chinese & many others use usd or euros for fixed prices),...the politics are only here to do the noise if u ask me...

thats how i see this stuff

in general...
politics make the noise
speculators speculate
hedgers hedge

Currency is used as a measure of value. This could be the measure of your value of labor, the value your product, the product of your service, etc. We have to use currency since no one wants to barter with each other on the scale of "I will paint your fence for some of your yams" for instance. There's simply too many of us for that to make sense.

However, what we can do is insert a medium of credit in there. This would be currency. Of course, for currency to be of any value we have to set it's value to something else as well, such as when it was set against the value of gold. It may not make sense that we have to set it's value against something, but contrast is the only way we know what anything's value is regardless of what it is. Contrast is the only way we know what anything is because we can compare it to something else and see what it is not. Such as, I am not a female, therefore I am a male.

Now that we have a standardised currency with some merit and value we now know that my painting services are worth $15 an hour. So therefore you give me $15 for each hour I paint so that I might use that "credit of services rendered" for whatever I might need, such as food or shelter (despite what teachers preach, I refuse to believe that clothing is an essential need). At the same time, this is also much more transient than having to barter back and forth.

Now, what if we want to buy something from a foreign country? Obviously we use different currencies so there must be some way to exchange one for the other. Usually this is done by the central bank of each country with some of the larger banks and business also interacting with each other. Of course, exchange rates are a bit trickier these days as currencies aren't in direct correlation with something solid like an ounce of gold. Because of this discrepency someone can come in and say "I think my dollar is worth 120 japanese yen and I want to trade", but the guy with the yen might say "My 100 japanese yen are worth a dollar". And it goes on back and forth, so on and on.

So it's kind of back to bartering again, but now we have millions of participants in this market of ours so price moves about quite easily. But we have the exchange market because everyone thinks their currency is valued differently compared to the currency they want and so we trade our currencies for value discovery and to hopefully get the amount of foreign currency we wanted given our current currency holdings.

If I trailed off a bit there at the end I apologise, I'll come back and revise when I don't have a hangover the size of the moon.

Price discovery and risk transference.

From Wikipedia, the free encyclopedia












A floating currency is a currency that uses a floating exchange rate as its exchange rate regime. A floating currency is contrasted with a fixed currency.
In the modern world, the majority of the world's currencies are officially but not really floating, including the most widely traded currencies: the United States dollar, the Japanese yen, the euro, the British pound and the Australian dollar. The Canadian dollar most closely resembles the ideal floating currency, since their central bank has not interfered with its price since it officially stopped doing so in 1998. The United States is a close second with very little changes in its foreign reserves; by contrast, Japan and the UK continually interfere with the prices of their respective currencies. From 1946 to the early 1970s, the Bretton Woods system made fixed currencies the norm; however, in 1971, the United States government abandoned the gold standard, so that the US dollar was no longer a fixed currency, and most of the world's currencies followed suit.
A floating currency is one where targets other than the exchange rate itself are used to administer monetary policy. See open market operations.
The People's Republic of China recently unpegged their currency, which was formerly pegged to the US dollar, and allowed it to float within a carefully managed range of values relative to the dollar and other currencies.

why pound value is so high?what is using to determine the value of currency?

which country had its biggest expansion so far ?
the governement can delete the zeros or determine the rate of new currency if independent, but the answer is inflation vs supply/demand...

The person who taught me trading told me that there is no such thing as over or under bought, too high or too low prices. The current price is by definition the fair price. It's only traders perception that something is too high or low that creates support or resistance lines.
This is why my strat pays a lot of attention to psychology.