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Reasons for trading in foreign currency

GuidesReasons for trading in foreign currency

Over $1.2 trillion of foreign currency is traded every day, with even small fluctuations having a direct effect on the value of the pound in your pocket. Why does all this foreign currency trading take place?

A major part of foreign exchange trading is linked to investment: speculators earn short-term profits from upward fluctuations in the rate of exchange. Companies also use foreign currency trading to protect themselves from losses when the exchange rate drops.

A significant part of foreign exchange trading occurs when businesses – and, to a smaller extent, individuals – buy goods or services from abroad. The preferred currency is the American dollar, which has global recognition.

We all know that the economy is linked to the rise and fall of the pound, but how does this work? Imagine an American tourist comes to London to buy a £100 pair of shoes. At the time he buys his traveller’s cheques, the foreign exchange rate is $1.45 to £1, so the shoes will cost him $145. However, if the pound falls, for example $1.35 to £1, the same shoes will only cost $130. If, on the other hand the pound rises, say $1.65 to £1, he will now pay $165.

Now contrast this to the kind of profits and losses a shoe importer might face, and you can see how small changes in foreign exchange rates can have significant effects on business.

We at Pure FX regularly trade large volumes of money on the foreign exchange for our business clients, keeping a close eye on the trends.

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