4

How does the fluctuation in the foreign exchange market occur at the same time in all countries?

For example:

If the U.S. Dollar depreciated, does it — and how — get automatically depreciated in all other countries? What mechanism or technology transfers this data to all countries?

  • $ cannot be depreciated in the US. Ever. $1 will always buy you exactly $1. – littleadv Dec 7 '13 at 7:19
  • ok.. i have edit my question.. thx for the input... – Ali Dec 7 '13 at 7:22
  • Who says that changes in currencies occur automatically and in all countries? – littleadv Dec 7 '13 at 7:23
  • thats what i'm asking... if it doesn't occur automatically, thn how does all changes occur in real time in all countries? – Ali Dec 7 '13 at 7:27
  • Hmm.... They don't, really. – littleadv Dec 7 '13 at 8:22
3

If "depreciation" is defined as inflation then a closed form relationship to exchange rates has yet to be determined, but academia generally agrees that if currency A inflates faster than currency B then currency A will drop in price relative to currency B. Even that fact is disputed under certain circumstances.

If it is defined as the phenomenon where the change in a currency's price relative to another currency changes all other exchange rates then it is called "triangular arbitrage".

In a 3 currency universe with currency A, B, and C where each are marketable without restriction, a change in the price of any combination will cause an arbitrage condition among all other possible combinations which in turn forces all combinations back into balance.

For example, If A:B, A:C, and B:C are all initially trading at 1:1, but A:B then trades to 2:1 while the other two remain as they were initially then a potential arbitrage condition arises because 1 B can now buy 2 As, and those 2 As can in turn buy 2 Cs, which can finally buy 2 Bs, allowing a 100% profit in B. Buys and sells will occur in some random fashion to remove this arbitrage condition. This is how an exchange rate involving A can affect a rate that doesn't involve A.

This balancing mechanism can only occur if there are no restrictions on currency trade, but black market exchange rates will almost always maintain equilibrium, the condition where arbitrage is not available.

1

It doesn't occur at the same time. Signal take time to travel from place to place. Perseus is an example of a service that tries to transfer data faster:

Previously, the fastest link available between the two points [Frankfurt and New York] was a fibre optic route that took 73.5 milliseconds. The new microwave service takes it down to 67.68 milliseconds. Perseus says it has plans to make the connection down to 67.39 milliseconds in July 2014.

At a time of high frequency trading those 5 milliseconds that their microwave service is faster allows traders to arbitrage between the prices of different market centers.

That trading keeps the prices of the market centers near each other.

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.