Forex Information - The Mysterious Workings Of The Exchange Rate And The Impact On Forex (Part 2)

The same holds true when you expand the definition to include foreign currencies. Instead of dollars and dimes, your dealing with Euros, yen, pounds and francs. EUR/USD=1.1023 means that each euro is worth $1.1023 (yes, in forex we go to four decimal points because of the large volume of trading). In reverse, that would be expressed as USD/EUR=.9071. In other words, if you want to trade US dollars for Euros, it will cost you $1,102.30 to get 1000 Euros.

But exchange rates move up and down! How does that work?

Let’s go back to our dollars and dimes. Let’s say that your corner store has decided that from now on, it will only accept payment in dimes. If you want to buy a gallon of milk there, your dollar bills are now worthless. In order to buy that gallon, you’re going to have to find someone to give you 30 dimes for your three dollars. That works out just fine – until there’s a shortage of dimes in the neighborhood. You go to your brother, whose been tossing all his change into a bucket for the last five years and tell him, “I’ll give you three dollar bills for 27 dimes because I need $2.70 to buy a gallon of milk.”

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