International trade, investment in foreign exchange (FOREX), and travel to other countries are the common activities which involve foreign currency. Given that currencies vary per country, several are involved in FOREX transactions. This situation is further complicated by the fact that foreign exchange rates fluctuate depending on economic as well as political developments, which may affect the countries concerned. For this reasons, monitoring of these rates is necessary, more so for those with large sums of money involved.

Foreign Exchange and International Trade

The global economy has made imports and exports a necessity. A country imports products and services which it lacks, and exports what it has in abundance. This is a requisite for economic growth. The accepted mode of payment in these transactions is a major currency like the US Dollar, unless there is a counter-trade agreement between the countries concerned and in the case of labor export wherein the currency of the employer is oftentimes used.

If you are buying from the United States, then the purchase is settled in US Dollars. If from Japan, then the payment is made in Japanese Yen. So the importer will have to acquire US Dollars or Japanese Yen at a favorable currency exchange, since getting any of these at a high rate translates to higher cost or a higher domestic price of goods or services.

Both are detrimental since the former results in less profit for the importer and the latter will either make the goods or services less competitive in the domestic market or bring about inflationary pressure.

So monitoring of exchange rate is necessary since it will impact on the business in particular and the economy in general.  To this end, some companies buy foreign currencies when the exchange rate is low and use it as a hedge for future imports.

Investment in FOREX

Some entities, particularly financial institutions, go into currency trading for the purpose of making money out of foreign exchange fluctuations. They buy or sell foreign currency depending on trends and forecasts.

Foreign currency is a part of the investment portfolio of many financial institutions, and the trading done is global in nature.  In fact the major players here are Central Banks of different countries.

Individuals who have access to foreign currency may also invest in FOREX. This is done by buying the currency when the foreign exchange rate is low and divesting of it when the rate is high. The process of divesting could be through direct selling to those in need of foreign currency, like importers, or by converting it to local money.

Foreign Currency Requirement for Travel to Other Countries

This is probably our most common reason for needing foreign currency.  Probably it is a vacation to a foreign land, or a business trip outside the country. Whatever the reason, foreign currency is needed (whether in actual cash or Traveler’s Checks), and this necessitates converting your local money to the currency of your country of destination.

Of course, you will be better off getting the foreign currency at a cheaper rate. Oftentimes, this favorable currency exchange rates may be availed of from local money changers or foreign exchange banks, both of which offer lower selling rates compared to traditional commercial banks.

Optimize Your Foreign Exchange Purchase

Regardless of your purpose, it is best to optimize your purchase of foreign currency. This means buying at the lowest possible rate, especially when the value of the foreign currency is expected to increase, and deferring your purchase when a depreciation of the currency in question is expected.

This necessitates an accurate foreign exchange calculator as well as some form of forecast regarding future trends.  There are sites that provide a foreign exchange rate calculator, as well as an exchange rate history for free. Based on these data, you can come up with an analysis to determine if it is time to purchase or if a deferment is in order.