In the retail currency exchange market, different buying and selling rates will be quoted by money dealers. Most trades are to or from the local currency. The buying rate is the rate at which money dealers will buy foreign currency, and the selling rate is the rate at which they will sell that currency. Currency for international travel and cross-border payments is predominantly purchased from banks, foreign exchange brokerages and various forms of bureaux de change.
These retail outlets source currency from the inter-bank markets, which are valued by the Bank for International Settlements at 5. In the foreign exchange market, a currency pair is the quotation of the relative value of a currency unit against the unit of another currency. 3225 means that 1 Euro will buy 1. In other words, this is the price of a unit of Euro in US dollars. Here, EUR is called the “Fixed currency”, while USD is called the “Variable currency”. There is a market convention that determines which is the fixed currency and which is the variable currency.
Accordingly, in a conversion from EUR to AUD, EUR is the fixed currency, AUD is the variable currency and the exchange rate indicates how many Australian dollars would be paid or received for 1 Euro. In some areas of Europe and in the retail market in the United Kingdom, EUR and GBP are reversed so that GBP is quoted as the fixed currency to the euro. This reduces rounding issues and the need to use excessive numbers of decimal places. Conversely, if the foreign currency is strengthening and the home currency is depreciating, the exchange rate number increases. Market convention from the early 1980s to 2006 was that most currency pairs were quoted to four decimal places for spot transactions and up to six decimal places for forward outrights or swaps. An exception to this was exchange rates with a value of less than 1.
000 which were usually quoted to five or six decimal places. In 2005, Barclays Capital broke with convention by quoting spot exchange rates with five or six decimal places on their electronic dealing platform. Each country determines the exchange rate regime that will apply to its currency. If a currency is free-floating, its exchange rate is allowed to vary against that of other currencies and is determined by the market forces of supply and demand. Exchange rates for such currencies are likely to change almost constantly as quoted on financial markets, mainly by banks, around the world.