The Language Of FX: Foreign Exchange Terms You Need To Know 1/3

Common Currency

A single currency issued by a number of states or countries collectively and used by them all for both domestic and international trade. The best-known examples are the Euro and the US dollar, but British pound sterling, Canadian dollar and Swiss franc are also common currencies.

Crawling Peg

A system of exchange rate adjustment in which a currency is allowed to fluctuate within a band of rates, rather than floating freely. The par value of the currency may need to be adjusted from time to time due to economic factors such as inflation. E.g. China’s onshore yuan has historically had a crawling peg to the US dollar; the Chinese central bank maintained it in a fluctuation band of 2% either side of a rate that was reset each day in accordance with government objectives. In August 2015, the People’s Bank of China announced its intention to move to a managed float.

Currency Pair

The value of a currency is determined by comparison with another currency. The first currency of a currency pair is called the "base currency", and the second currency is called the "quote currency". ISO three-character currency codes are used for currency pairs; USD = US dollar, AUD = Australian dollar, GBP = UK pound sterling, etc.

So, for example, USDGBP is the value of the UK pound sterling in US dollars; USDCNH is the value of the offshore Chinese yuan in US dollars.

Economic Risk

The risk that an import or export business’s competitiveness may be adversely affected by macroeconomic factors such as exchange rate movements, by regulatory changes, or by political factors such as instability or regime change, in a country in which it is operating.

Fixed Exchange Rate

In a fixed exchange rate system, the value of the currency is set by the government or central bank. The value may be tied to another currency (such as the US dollar or the Euro), to a basket of currencies, or to gold. E.g. Bulgaria’s currency, the lev, is fixed to the Euro at a rate of 1.95583 leva = 1 Euro; this is a "currency board" arrangement whereby the Bulgarian central bank maintains FX reserves sufficient to guarantee conversion of leva to Euro at the fixed rate.

Since the demise of the gold standard, fixed rate currency regimes have become increasingly rare: most countries which actively control the external value of their currencies do so by means of a crawling peg or managed float.

Floating Exchange Rate

The value of a floating currency is determined by purchases and sales of that currency relative to other currencies on international FX markets. If there are more sales than purchases, the exchange rate falls: if there are more purchases than sales, the exchange rate rises.