Dual Currency Services: Understanding Forex Rate Speculation

What Is a Dual Currency Service?

A dual currency service is a forex trading service that allows an investor to speculate on exchange rate movement between two specific currencies through a fund or instrument.

A dual currency service typically requires the investor to make directional speculations between the currencies, such as speculating that the U.S. dollar will rise against the yen.

Key Takeaways

• A dual currency service is a basic forex trading service allowing speculation in exchange rate movements between a pair of currencies.
• Often using major currency pairs, a dual currency service is intended for directional bets in exchange rate spreads and not on spot rates.
• Currency pairs are the foundation for all forex trading strategies.

Understanding Dual Currency Services

Dual currency service instruments typically involve currency pairs of major, liquid currencies, such as the U.S. dollar, British pound, Swiss franc, euro and Japanese yen. In a currency pair, the value of two currencies, the base currency and the quote currency, are compared to each other. It looks at how much of the quote currency is required to buy one unit of the base currency. Currency pairs are traded in the foreign exchange market, or the forex market. The most traded currency pair in the world, and the most liquid one as well, is the euro against the U.S. dollar, which is denoted as EUR/USD.

Because a dual currency service is a directional service, investors are able to make generalized price bets as opposed to bets on the specific exchange rate spot prices.

Forex and Currency Pairs

The foreign exchange (FX) marke is where currencies are bought, sold, exchanged, and where they become the subject of speculation. It is the largest and most liquid financial market in the world.

All forex trades involve buying and selling of currency pairs, where one currency is sold and another is bought. Often, currency pairs are thought of as single units that can be bought or sold. The number of currency pairs that exist varies as currencies come in and out of circulation and existence.

When traders buy or sell currencies in the foreign exchange market, they are not trading actual physical currencies, but instead making a bet on the strength of the currency relative to another. If they are buying a currency, they are hoping its value will strengthen in relation to the currency in the pair that is sold in order to make a profit, whereas when they sell currencies they hope for the opposite.

Generally, currencies that are traded in exchange for the U.S. dollar (USD) are called major currencies, while those currencies that are not associated with the USD are referred to as minor currencies. They are not as liquid as major currencies. Some examples include EUR/GBP and EUR/CHF. When currency pairs include the currencies of emerging markets, they are referred to as exotic currencies pairs, an example of which would be USD/MUR. These currency pairs are not as liquid and have wider spreads.