How is foreign exchange trading regulated?

Financial markets

Exchange rates are formed on the foreign exchange market, the respective exchange values ​​of the currencies with one another. If the demand for a currency increases, the price increases. Traders buy or sell currencies to take advantage of price developments.

Tokyo pedestrians look at an electronic display board showing the Japanese yen versus the US dollar. (& copy picture-alliance, AP Photo)

What interests us in money is what we can buy for it. This purchasing power in one's own country is called domestic value. However, the euro also has an external value, which we become aware of when we travel to a country that does not belong to the euro zone. As soon as we have arrived at the airport in New York, we first have to get US dollars. How many of the green American notes we receive for our colorful euro notes is determined by the external value of the euro.

There is also an (international) market for money, the foreign exchange market. This evaluates the exchange value of the currencies with each other. How strong a currency is, of course, largely depends on how big and stable the economy behind it is. The different currencies of the world are traded daily on the foreign exchange markets. It works like any other market. If the demand for the euro is greater than the supply, the euro will rise, while the US dollar or the Japanese yen will lose value. It works the other way around.

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The euro and dollar exchange rates are determined in the free play of forces. (& copy AP)
In reality, however, the exchange rate is very little influenced by the tourists who exchange their travel funds at various airports around the world. In fact, they are determined by international forex traders looking for a good investment for their money, mutual funds, or pension funds. In which country or currency area are there bonds that can be bought and that guarantee good interest rates? That is the first question. The second, however, is how inflation is doing in this country. Nobody has ten percent interest a year if money loses 20 percent of its value at the same time. So interest-bearing bonds are sought in a stable economic area that is also so reliable that you can be sure to see your money again. Argentina had attracted international investors for years with attractive interest rate offers, but then declared itself insolvent at the end of 2001 and stopped repayments. The country did not begin to service its loans again until four years later, but only paid back 25 percent of the loan amount.

And the third question that every forex trader asks, of course, is whether it isn't more lucrative than investing in stocks in bonds. That depends on how the stock market prices will develop. So, as with any exchange deal, in forex trading, expectations of the future are part of the deal. Therefore, every sign from the economy or economic policy is attentively registered and the forex traders then react very quickly. Can one hear from a statement by the President of the US Federal Reserve that the US will raise interest rates? Buy dollars quickly so you can take advantage of them. Are US growth numbers worse than originally thought? Sell ​​dollars quickly because they are depreciating. This is how the (serious) game works.

A passerby looks at a display board for exchange rates. (& copy AP)
The euro and dollar exchange rates are determined in the free play of forces. Of course, every change in course has consequences. We notice the difference between whether the dollar costs 80 cents or, as we already had, 1.20 euros when we have a coffee in New York. But we are also affected when we stay at home. If the dollar rate rises (and that means at the same time: the euro rate falls), not only the euro becomes cheaper for the Americans, but all products from the euro area. They will buy more of it, which is good for our export. But all products that we source from the US (or that are billed in dollars, like Arabian oil) are becoming more expensive for us. If the euro rate rises, the opposite is true: American products become cheaper with us. This is good for the consumer, but it means increased competition for German companies. At the same time, German products will become more expensive in the USA, and our exports to America will then likely decrease.