FOREX: An Overview
MEANING
FOREX is the term used for simultaneous trade of foreign currencies. It is usually done by trading out two different currencies. As to date FOREX is the largest dealing activity in the world, in terms of monetary value, and it also includes trading between large foreign banks, foreign central banks, currency speculators, multinational companies, governments, and financial markets, institutions and even retail traders may benefit from this though they maybe considered as the smallest unit of this trade. Pankaj Andy once wrote in his article that it is one of the most unique trading system to date because it is almost free from all the external controls and it is also consists of the largest liquid financial market.
HISTORY
An agreement called the Breton Woods Agreement was established in 1944 primarily to stabilize international currencies and prevent money going out across nations. This agreement put a halt to all national currencies against the dollar and set the dollar at a rate of $35 in exchange for gold, specifically an ounce of gold.
Prior to this agreement the trade of has been operative since 1876. The gold standard operation used gold to back each currency and thus prevented rulers from abusing money rates and triggering inflation and other possible economic problems.
The gold barter operation had its own loopholes, however. As an economy grew, many used gold in exchange for imported goods (this is called barter especially in the Asian continent). As a result the country's monetary supply would drop down resulting in inflation and a slowing of economic activity to the extent that a recession existed.
This kind of withdrawal would eventually cause prices of goods to fall so low that foreign nations would find it attractive and turn led to an inflow of gold back into the economy and the resulting increase in money supply, rates of interests again was borne back to normal and the economic activities seem to slowly strengthen, thus the economy is slowly becoming out of recession. These patterns prevailed throughout the world during the gold barter years until the outbreak of the first World War. The World War I is said to interrupt the free flow of trade and thus the movement of gold trade. In addition, the second World War very well affected international exchange. Post war construction resulted in hike of capitals. This event caused destabilization of the currency swapping standards that had been set-up by the Bretton Woods Agreement.
The later era of FOREX emerged in 1971 during the downfall of the Bretton Woods Agreement. With United States currency no longer convertible into gold, this signified an increase in trading opportunities and currency market volatility. In 1973, currencies of the major industrialized nations impressively glides and mainly interrupted by the forces of supply and demand. Prices were set, with volumes, speed and prices are increasing in a high mark during the 1970's. This led to new strategies of the government such as deregulation of trade. It also led to a rise in the power of speculators.
IMPACT
FOREX market is directly hammering every trade tools such as bond, equity, private property, assets and any other available investments which are very much accessible to foreign investors. Foreign exchange trade plays a major role in supplying solutions to financial problems such as bloated government deficits, control over equities and real-estate holdings. Foreign exchange trading helps determine company house rules and employment decisions, and even determines who owns the banks at an individual maintains an accounts. The monetary unit in one's pocket is literally the stock in one's own country, and like a share, its value in the international trading system might provide for either an opportunity or for loss.
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