Forex What is it?
Dec 10 2017, 00:00
The foreign exchange market, more commonly known as Forex, FX, or currency market, is when one currency is exchanged for another currency. The foreign exchange market is by far the largest market in the world, in terms of transaction value, and includes the exchanges that take place between large banking institutions, central banks, currency speculators, multinational companies, governments, and other financial markets and institutions. . The exchange activity that takes place in global FX markets amounts to more than 1,900 billion dollars a day (on average). Retail traders (small speculators) represent a small part of this market. They can only participate indirectly through of brokers or banks. History of Forex The FX market is an inter-bank money market or between other counterparties, created in 1971 when floating exchange rates began to appear. The foreign exchange market is enormous compared to other markets. For example, the average daily volume of trade involving US Treasuries is $ 300 billion and the US stock market has an average daily volume of less than $ 10 billion. Ten years ago the Wall Street Journal estimated that the daily volume of exchanges that take place on the forexecceda 1,000 billion dollars. Today the volume of transactions is estimated at around 4,000 billion dollars a day. Prior to 1971, an international agreement called the Bretton Woods Agreement prevented speculation in the currency markets. The Bretton Woods agreements were concluded in 1944 with the aim of stabilizing international currencies and preventing the flight of capital between nations. These agreements set an exchange rate between all currencies and the dollar and set the exchange rate between the dollar and gold ($ 35 per ounce). Prior to this agreement, the gold exchange standard was in use as early as 1876. The gold standard foresaw the use of gold as the basis of each currency and thus prevented kings and rulers from arbitrarily depreciating money and triggering inflation. . The gold exchange standard presented, however, numerous problems. As it grew, an economy would have imported goods from abroad until the gold reserves were depleted. The result of this was a restriction of the money supply in the country that caused a rise in interest rates resulting in a slowdown in economic activity that could have also led to recession. Finally, the recession would have caused prices to fall so low that they would have appeared cheap to other countries. This in turn led to a reverse flow of gold entering the economy and the resulting increase in the money supply caused a fall in the interest rate and a strengthening of the economy. These boom-recession patterns were common throughout the world during the years of the gold exchange standard and until the outbreak of the First World War that interrupted the free flow of trade and consequently the movements of gold. After the war the Bretton Woods Agreement was adopted, with which the participating nations agreed to keep the value of their currencies within a narrow exchange rate with the dollar. A rate was also set to establish the dollar's ratio to gold. Countries were forbidden to devalue their currency over 10% to improve their commercial position. Following World War II, international trade expanded rapidly due to post-war reconstruction needs and this involved massive capital movements. This destabilized the exchange rates that had been set by the Bretton Woods agreements. These agreements were finally abandoned in 1971, and as a result the dollar was no longer convertible into gold. Starting from 1973, the currencies of the most industrialized nations became more freely floating, being driven mainly by supply and demand forces. Prices were made up of volumes, speed and increasing volatility during the seventies. This led to the emergence of new financial instruments, market deregulation and free trade. It also caused an increase in the power of speculators. In the eighties, the advent of computers accelerated international capital movements and the market became more continuous, with exchanges taking place between the Asian, European and American continents, and the relative time zones. The big banking institutions created operating rooms where hundreds of millions of dollars, pounds and yen were exchanged in a matter of minutes. Today's brokers operate daily in the forex, using electronic tools, for example in London, where single exchanges for tens of millions of dollars are currently concluded in a few seconds. The market has changed significativame