Foreign Exchange Markets

"On December 22, 1717, Sir Isaac Newton, master of the English mint, established the price of gold at 3 pounds, 17 shillings, 10.5 pence per ounce" (Ball−McCulloch−Frantz−Geringer-Minor, 2005). At this time, England utilized the Gold Standard. The Gold Standard simply means trading gold for a pre determined currency value. During Newton's prime, the method of finance was mainly the Gold Standard, and did not halt until after World War l. London, England worked as the international hub, and financed much of the world trade. There are positive and negative aspects of utilizing the Gold Standard. The functions of the world's major exchange markets are sophisticated, deep, and complex. Understanding the Gold Standard and how it correlates helps decipher some of the more complex concepts in exchange trading.

Money is like many other things in terms of value. In terms of the U.S. economy as a whole; too much money decreases the value and too little evolves into a recession. In other words, the U.S. government cannot just pour all the money it wants into the system. When there is too much money chasing too little goods, the U.S. dollar decreases in value (inflation). It is imperative to the U.S. that foreign countries invest in the U.S. dollar. Therefore, the U.S. currency must remain strong. If too much money declines the U.S. dollar value, foreign countries will invest in a stronger currency (e.g. Euro, Yen).

According to Jacques Rueff, discipline is the key to economic stability. Jacques' argument is quite attractive in economic terms. Under the Gold Standard, governments cannot just create money out of nothing. The government may only generate money that is backed by tangible gold. Under this discipline, governments may not create money for political gains. The bottom line; is the future of the economy. Creating a fantasy world (generating money from nothing) only works for so long. Eventually the cycle ends. This discipline is one potential advantage of utilizing the Gold Standard.

The IMF (International Monetary Fund) - Impact on business and people

The IMF (International Monetary Fund) has a direct impact on business and people worldwide. According to the IMF website, the institution supports three main objectives, 1) Surveillance 2) Lending 3) technical assistance (IMF.org). Let us touch on each of the objectives.

Surveillance refers to the process of monitoring and evaluating economic development, and the provision of policy advice, aimed at crisis prevention (IMF.org). This element can be crucial to the survival of the global marketplace in whole. It is important to have an independent organization that specializes in foreign monetary exchange and crisis prevention. When or if a crisis begins to evolve the IMF will likely (should) be on top of the initiation.

The IMF lends to countries with BOP (balance of payment) difficulties. As mentioned earlier, the IMF devises polices to assist in the correction of failed financial plans. If a low income nation needs assistance, the IMF will provide temporary financing and polices to correct the underlying problems. Again, this is a crucial component of foreign exchange sustainability.

Finally, the IMF provides technical assistance in its specialty. In conclusion, it is easy to see the vital role that this organization plays. IMF - Overseer of foreign exchange, potential financial lender / policy advisor, and technical supporter. This independent organization is needed and should remain a component of the world exchange.

The World's Largest Currency Exchanges

Money flows through many economies throughout the world. The world's largest currency exchange countries are the United States, Britain, France, Germany, and Japan. Each country maintains respective exchange rates and targets. It is vital to maintain a sufficient value for each currency.

Currency trading is a daily activity that conducts through the FX (forex) trading arena. Foreign exchange (forex) markets form the core of the global financial market, a seamless twenty-four hour structure dominated by sophisticated professional players, commercial banks, central banks, hedge funds and forex brokers - and often extremely volatile. Investors, particularly American ones, tend to ignore currency movements, and financial analysts are trained to analyze the details of how the forex markets perform, the Author thinks this is a mistake. In 1997 the Asian crisis and its aftermath vividly reveal, foreign exchange these days tends to lead economic activity. And the foreign exchange markets are huge, growing and increasingly powerful and according to the Bank for International Settlements, the central bank for central banks, average daily turnover on the world's foreign exchange markets reached almost $1,500 billion in April 1998, 26% higher than when it last measured forex flows in 43 different countries three years earlier.

Transactions involving dollars on one side of the trade accounted for 87% of that forex business with almost a third of all forex trading takes place in London, of the $3.98 trillion daily global turnover, trading in London accounted for around $1.36 trillion, or 34.1% of the total, making London by far the world's largest center, with New York and Tokyo second and third. According to the Author; London forex trading grew more slowly than New York over the three years to 1998, its average daily turnover remains greater than New York and Tokyo combined, having risen from $464 billion to $637 billion (Lebaron, 1999).

Foreign exchange trading increased by 38% between April 2005 and April 2006 and has more than doubled since 2001. This is largely due to the growing importance of foreign exchange as an asset class and an increase in fund management assets, particularly of hedge funds and pension funds. The diverse selection of execution venues such as internet trading platforms offered by companies such as First Prudential Markets and Saxo Bank have made it easier for retail traders to trade in the foreign exchange market. In the past, trading in the real economy controlled relative currency relationships. Since most currency flows were to settle trading patterns, there was a balance as goods and capital moved at about the same speed, now the leads and lags are the other way around, while in name forex markets exist to facilitate international trade, in practice, the bulk of turnover in these markets is attributable to speculation just as oil is traded and prices accrue more often in speculation than supply and demand.

In the real world, there is little or no insider tips into foreign exchange markets. Exchange rate fluctuations are usually caused by actual monetary flows as well as by expectations of changes in monetary flows caused by changes in GDP growth, inflation, interest rates, budget and trade deficits or surpluses, large cross-border M&A deals and other macroeconomic conditions.

In conclusion, many factors like the above mentioned affect currency exchange, but in reality and in the end; currency prices are a result of supply and demand. The world's currency markets can be seen as a big salad bowl with all ingredients being tossed representing currency, giving any currency value depending on political, market conditions, and especially economic indicators where a deficit or surplus can hugely impact how one particular currency rate is. Also the mass production of one currency will create that particular currency to lose value because there is no hard currency to back it up and this also affects how one currency real value is.

References

Ball−McCulloch−Frantz−Geringer-Minor. (2005). International Business. The McGraw-Hill Companies.

Lebaron, D. (Ed.). (1999). John Wiley and Sons, Inc: Book of Investment Quotations

IMF Website