Foreign exchange refers to foreign currency exchange. Frequent international trade activities essentially require a considerable amount of foreign currency transactions, so foreign exchange also refers to the payment tool used for international settlement in foreign currency.
Foreign exchange trading is the exchange of one currency for another, involving the exchange rate between the two currencies. For example, the USD/JPY exchange rate is 100, which means that without considering the bid-ask spread and handling fees, a person holding US dollars can exchange 1 US dollar for 100 Japanese yen. Conversely, a person holding 100 Japanese yen can exchange 1 US dollar, thus forming a buying and selling transaction.
In the international foreign exchange market, there are exchange rate quotes (exchange rates) of currencies issued by countries around the world. The display method is always two currencies as a pair, so it is also called a currency pair . Common ones include EUR/USD, USD/CAD, AUD/JPY EUR/GBP, etc. Most of them are real-time reference quotes of various currencies that can be exchanged with different currencies. Since there are more than 100 currencies in the world, it also means that this cross-exchange combination can be as many as tens of thousands.
This foreign exchange market quotation system and system is centered on the "US dollar". All currencies are exchanged based on the US dollar, and all other swap rates are calculated using the exchange rate for the US dollar. This conversion will not have errors, and even if it does, it will be quickly adjusted by the market due to arbitrage.
For example, EUR/USD=1.5, GBP/USD＝1, which means 1EUR can be exchanged for 1.5USD, 1GBP can be exchanged for 1USD, so the EUR/GBP exchange rate can be calculated to be 1.5. When EUR/USD rises to 2, GBP/USD rises to 1.6, and the US dollar also depreciates, the EUR/GBP exchange rate will be adjusted to 1.25. This means that 1EUR has fallen from 1.5GBP to 1.25GBP.
It should be noted that the meaning behind the so-called currency pair also points out that foreign exchange trading is essentially based on the relative value of two currencies, rather than measuring the absolute value of a single asset. For example, the appreciation of the US dollar refers to the appreciation relative to other currencies. Different currencies may also appreciate to different degrees due to different factors. On the other hand, even if the overall value of the US dollar remains unchanged, when other currencies appreciate, the US dollar will naturally depreciate relatively.
In addition, in the above example of USD/JPY, it can be reflected that foreign exchange transactions are also a pair. When the holder of USD exchanges for JPY, there is actually a counterparty holding JPY also exchanging for USD. That is, one party buys JPY and sells USD, and the other party buys USD and sells JPY. From the perspective of investment and trading, or excluding the premise of actual needs, it also represents the judgment of both parties on the future price trend of the currency.
All financial products traded on margin carry a high degree of risk to your capital. They are not suited to all investors and you can lose more than your initial deposit. Please ensure that you fully understand the risks involved, and seek independent advice if necessary.