A:

The forex spot rate is determined by supply and demand. Banks all over the world are buying and selling different currencies to accommodate their customers' requirements for trade or to exchange one currency into another.

For example, an American bank receives a deposit from a German bank on behalf of their client who wants to buy something from a company in America. The German client has to pay the American supplier in dollars. The German client has euros and these euros need to be exchanged then for dollars. The German buyer will instruct his bank to exchange the euros to dollars and transfer the money to the U.S. supplier. If the bank doesn't have a supply of dollars, it will buy the dollars from another bank and sell euros.

The sum total of all banks selling dollars and all banks buying dollars creates a supply and demand for U.S. Dollars. If the demand for dollars increases then the dollar will appreciate against other currencies. If the demand drops then the dollar depreciates against the other currencies. The rates are set by all the participating banks bidding and offering currencies all day long amongst each other. This is the interbank system and is the way currencies are traded and the way exchange rates are determined. (For more, see The Foreign Exchange Interbank Market.)

This question was answered by Selwyn Gishen.

RELATED FAQS
  1. How does the balance of payments impact currency exchange rates?

    Take a brief look at the relationship between a nation's balance of payments and the exchange rate value of its currency ... Read Answer >>
  2. How do you make money trading money?

    Investors can trade almost any currency in the world. Investors, as individuals, countries, and corporations, may trade in ... Read Answer >>
  3. How do I convert dollars to pounds, euros to yen, or francs to dollars, etc.?

    Currency can be converted using an online currency exchange or it can be converted manually. To use either method, you must ... Read Answer >>
  4. How do I find out my bank's bid-ask spread for currency conversions?

    Learn how to find your bank's bid-ask spreads for currency conversions, and understand why you should consider alternative ... Read Answer >>
  5. Can I trade a currency when its main market is closed?

    In the forex market, currencies from all over the world can be traded at all times of the day. The forex market is very liquid, ... Read Answer >>
Related Articles
  1. Trading

    The Forex Market: Who Trades Currency And Why

    The forex market has a lot of unique attributes that may come as a surprise for new traders.
  2. Trading

    Forex Trading: A Beginner's Guide

    Learn about the forex market and some beginner trading strategies to get started.
  3. Trading

    Here's How You Calculate An Exchange Rate

    Struggling to get a grasp on exchange rates? Here's what you need to know.
  4. Investing

    The Foreign Exchange Interbank Market

    Can your forex broker offer you the most competitive pricing? Learn how the market's biggest players affect you.
  5. Trading

    How Are International Exchange Rates Set?

    International exchange rates show how much one unit of a currency can be exchanged for another currency.
  6. Investing

    How To Calculate An Exchange Rate

    An exchange rate is how much it costs to exchange one currency for another.
  7. Trading

    The 6 Most-Traded Currencies And Why They're So Popular

    Every currency has specific features that affect its underlying value and price movements in the forex market.
  8. Trading

    The Currency Market Information Edge

    Unique features of the forex market may allow larger players to get a jump on smaller ones.
  9. Trading

    Forex Trading: A Beginner’s Guide

    As businesses continue to expand to markets all over the globe, the need to complete transactions in other countries’ currencies is only going to grow.
  10. Trading

    Understanding The Spread in Retail Currency Exchange Rates

    Understanding how exchange rates are calculated and shopping around for the best rates may mitigate the effect of wide spreads in the retail forex market.
RELATED TERMS
  1. Dollar Rate

    The exchange rate of a currency against the U.S. dollar (USD). ...
  2. Conversion Rate

    The ratio at which one currency can be exchanged for another. ...
  3. Cross Currency

    A pair of currencies traded in forex that does not include the ...
  4. International Currency Exchange Rate

    The rate at which two currencies in the market can be exchanged. ...
  5. Forex Market

    The market in which participants are able to buy, sell, exchange ...
  6. Currency Pairs

    Two currencies with exchange rates that are traded in the retail ...
Hot Definitions
  1. North American Free Trade Agreement - NAFTA

    A regulation implemented on Jan. 1, 1994, that decreased and eventually eliminated tariffs to encourage economic activity ...
  2. Benchmark

    A standard against which the performance of a security, mutual fund or investment manager can be measured.
  3. Mobile Wallet

    Mobile wallet is a virtual wallet that stores payment card information on a mobile device.
  4. Leverage

    1. The use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment. ...
  5. Trumponomics

    Trumponomics is a term for the economic policies of President Donald Trump.
  6. Universal Health Care Coverage

    An organized healthcare system that provides healthcare benefits to all persons in a specified region. Many countries, such ...
Trading Center