Why do traders participate in foreign currency exchange? It seems that this market is bustling with activity all the time. Aside from the four major participants of the FX market - banks, government through their central banks, companies, and brokers, individuals themselves have started to see the promise of the currency exchange market, so much so that they have also taken up foreign currency exchange as an investment option. With participating in forex, you can earn profits brought about by the rise and fall of exchange rates. Furthermore, entities continue to trade so that they can shield themselves from loss due to these exchange rate fluctuations. Lastly, they participate in forex to get currencies from other countries that they would need when engaging in economic activity with those other countries.
What actually determines foreign currency trade rates? Perhaps the major factor is, as anything with a price or value, supply and demand. For example, if the demand for Japanese yen is greater than what is currently available, it is expected that the rate of the yen will rise. On the other hand, if there are more yen available than the demand for it, the price of the yen will fall. In the local context, the two major factors that influence the supply of a currency are the sending that occurs in the country (the more citizens of a country spend, naturally the higher the demand is for their currency) which goes hand in hand with the policies and machinations of the monetary authority of the country, which is usually its Central Bank. The government closely follows economic activity to match the demand and supply of their currency depending if they wants the value of their currency to drop or rise.But you may think that a low value of a currency is disadvantageous altogether. This may not really be the case in foreign currency exchange. For example, if the yen is strong, Japan would be able to buy good overseas at a cheap rate. But at the same time, Japanese products would be expensive to foreigners as their currency would be weak compared to the yen, which would clearly be a disadvantage to Japanese exporters. A weak yen would benefit companies that export a lot since their products would be cheaper to their markets abroad, and at the same time the Japanese would find foreign goods more expensive , making the demand for imports fall.