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  • What determines the price of a currency? Before we attempt to answer that question, we need to define one of the most basic economic laws, namely the principles of supply and demand.

    How the Principles of Supply and Demand Work?

    In simple terms, these principles explain that if the supply for a product is lower than the demand, it is naturally that the price of the product goes higher. Since there is more people asking for the product then there is available. In the opposite scenario, when the supply of a product is higher than the demand for the product, it is logical that the price of that product will decrease. Considering that people are asking for it less and there is a surplus of the prodcut.

    How Are Currency Prices Determined?

    Now that we know the laws of supply and demand, let's give the answer to the key question of this lesson: “How are currency prices determined? The Supply and Demand laws also apply to currencies. More demand or desire for a certain currency will cause its valuation to rise against other currencies. However, the value will drop when individuals and institutions choose not to hold a country's currency. For example, if the global demand for US dollars increases, the value of the USD will appreciate against the other currencies. Currency prices are can also be described as spot exchange rates. This is the rate at which one currency will trade for another today, and it is the most actively traded. In other words, this market determines the price at which one particular currency pair can be exchanged.

    Who Are the Daily and Biggest Influencers of Currency Prices?

    The total Forex volume is transacted through about 10 of the world's largest banks, which include JPMorgan Chase & Co., HSBC Holdings PLC, and other banks. They are in charge of determining prices for the bank's clients and are also in charge of offsetting risk with other banks. The total number of all the banks, both those that are buying and selling dollars creates a supply and demand for currencies, with U.S. dollars as the main currency. This includes the interbank system, which is responsible for the creation and fluctuation of currency prices. Bank dealers usually arrive at a specific valuation for a currency based on a variety of factors that change constantly. These factors include:

    • The current market rate,

    • How much volume is available at that specific price level,

    • Their opinion on where the currency is next headed,

    • And their inventory positions.

    As a result, it's very interesting to see when traveling abroad to find out the different Foreign exchange rates in different countries.

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