7

 Foreign Exchange Market

BookMyforex 2015. This file is licensed under the Creative Commons Attribution-Share Alike 4.0 International license

The foreign exchange market (Forex) is the market in which participants can buy, sell, exchange and speculate on currencies. Foreign exchanges are made up of banks, commercial companies, central banks, investment management firms, hedge funds and retail Forex brokers and investors. The Forex market is the most significant and largest financial market in the world. Aside from providing a floor for the buying, selling, exchanging and speculation of currencies, the Forex market also enables currency conversion for international trade and investments. Moreover, the international monetary system refers to a system which contains rules about the use and exchange of money around the world.  Every country has its own system of currency, and the international monetary system governs the rules for valuing and exchanging these currencies.

Strong vs. Weak Currency

A strong dollar means that one currency is worth more in value in comparison to other countries’ currency, and therefore we can buy more goods and services from another country. Moreover, a weak dollar means that our currency is less valuable, and we are unable to purchase as much as other countries’ goods and services.

US Importers love a strong dollar because it means their money is worth more and therefore can buy more. US Exporters do not like a strong dollar because that means they produced their product with a strong dollar and then have to sell it to a weaker and therefore less valuable currency. On the other hand, when the dollar is weak US importers suffer because their money can’t buy as much. However, it’s great for US exporters because they spent weak dollars to produce the goods, but international customers buy the product with more valuable currency.

Law of One Price

The law of one price is an economic theory that the price of a given asset, commodity, or security is the same price when exchange rates are taken into consideration. However, if the Law of One Price truly applies, then you should not be able to buy anything on the market and sell it on another and make a profit out of it. (Investopedia 2015)

Purchasing Power Parity

Purchasing Power Parity (PPP) Is the economic theory that compares different countries currency through a market approach. This concept states that two currencies are in equilibrium or the same when their market basket of goods are priced the same in both countries. PPP rates are more accurate than market-exchange rates because market-exchange rates are heavily influenced by interest rates, government involvement, and activities such as hedging. Additionally, PPP rates are solely determined by comparing the cost of identical items in different countries. These rates are more difficult to establish due to factors of consumer habits, the variability of the products (they are not the same or contain the same materials even though the final product is the same, i.e., a gallon of milk) as well as each country’s economic influences.

Why It Matters

Exchange rate display seen at seen at Suvarnabhumi International Airport, Thailand, User Mattes 2015

The foreign exchange market affects everything from the price of groceries, gas, loans, investments, travel outside of the United States and tourism right here in Utah. All of these things influence what you eat, what you wear, the interest rates on your student loans, where you can afford to travel and potentially your job.We will cover tourism in depth in the examples here in Utah section. The Forex isn’t just about foreign money or ratios on the exchange rate market. The fact is that it affects our daily life in many ways. The ever-fluctuating strong and weak US dollar played against other countries affects our very quality of life-based on how much we can buy and consume.

Examples Here in Utah

Bryce Canyon, Utah, USA This file is licensed under the Creative Commons Attribution-Share Alike 4.0 International, 3.0 Unported, 2.5 Generic, 2.0 Generic and 1.0 Generic license. User Tobi 87 2007

The Foreign Exchange Market (Forex), related to exchange rates affects almost every aspect of Utah living and business. In the previous section, we mentioned a few areas that affect students directly at Salt Lake Community College such as rates on tuition loans, travel outside of the US, Jobs, gas, and food.

For Utah businesses that export, which top industries would be metals, electronic circuits, civilian aircraft parts and engines and specific medical equipment, the Forex will affect the profitability of each company based on the exchange rate of the countries they are exporting to.

The most significant area that the Forex affects Utah Residents is tourism. Utah is a diverse state that heavily relies on travel and outdoor recreation. The tourism industry creates a large number of jobs for Utahans and tourism brings in taxes and private business revenue. To put into perspective just how important tourism is, let’s look at some numbers.

In the most recent report from 2013, The travel, tourism, and recreation (TTR) industry spent $7.5 billion in the Utah economy. Non-Resident’s (tourists) accounted for bringing in $6.4 billion of that. This type of commercialism directly benefits Utah’s economy and Utah businesses by helping expand our economy, supporting jobs and generating steady income for residents.  If tourism were an “export,” it would be the second largest right behind metals ($8.3 billion) and ahead of computers and electronics ($2.6 Billion) (Miler, 2017).

Utah’s tourism industry brings in an estimated 132,681 jobs. This data means that 1 out of 10 Utah jobs is related to tourism. In 2013 Utah received approximately $1.02 billion in TTR related tax revenue.

With numbers like these, it’s easy to put into perspective just how much of Utah’s economy relies on tourism. Tourists not only come from within the United States but internationally as well. We are so diverse and abundant in our recreation with our 14 ski resorts (11 of them are within 1 hour or less from the SLC international airport), five national parks, seven national monuments, one national historic site, two national recreation areas and 43 state parks!  Utah is also the host of several art events that bring in tourists from all over, some of these are the Sundance Film Festival, Utah Arts festival, Athletic events (go runners!) Utah Shakespeare festival, as well as trade shows and conventions. The BEMR report shows that in 2013 Utah reported 6.3 million visits to national parks, 3.8 million national park visits, 2.1 state park visits, and 4.2 million skier/snowboarder days.

So, concerning the Weak Dollar vs. Strong dollar that comes from the influence of the FOREX, when America’s dollar is weak, we attract more international travelers as travel doesn’t cost as much. A weaker dollar keeps and creates more jobs for Utah Residents and helps our economy grow. When our dollar is strong, we do see a reduction in tourism, and that also affects Utahan’s and our quality of life.

According to a report from the Utah Office of Tourism, visitors from Canada are expected to increase substantially over the next several years if our dollar remains weaker compared to theirs. Traveling here specifically to Utah is an affordable and attractive choice.

References

Foreign Trade Div. (2018, February 21). Foreign Trade. Retrieved from https://www.census.gov/foreign-trade/statistics/state/data/ut.html 

Law Of One Price. (2015, July 29). Retrieved from https://www.investopedia.com/terms/l/law-one-price.asp

Leaver, J. (2014). Utah Economic and Business Review. Bureau of Economic and Business Research David Eccles School of Business University of Utah, 74(4), 1-13.

Miler, D. B., & Nield, J. (2017, May 09). Trade Trajectory: A deeper look at Utah’s 2016 export numbers. Utah Business Magazine. Retrieved from https://utahbusiness.com/deeper-look-utahs-2016-export-numbers/

Staff, I. (2015, July 29). Law Of One Price. Retrieved from https://www.investopedia.com/terms/l/law-one-price.asp

Staff, I. (2008, May 14). Foreign Exchange Market. Retrieved from https://www.investopedia.com/terms/forex/f/foreign-exchange-markets.asp

Utah tourism going strong. (2017, December 20). Retrieved from http://eccles.utah.edu/news/utah-tourism-going-strong-according-to-a-new-tourism-industry-report-by-bebr/

What are the Functions of Foreign Exchange Market? (2016, July 09). Retrieved from https://businessjargons.com/functions-of-foreign-exchange-market.html

LICENSES AND ATTRIBUTIONS

What is the International Monetary System by Lumen Learning is licensed under CC BY-NC-SA 4.0 / A derivative from the original work