Introduction to The Foreign Exchange Market

The Foreign Exchange Market (Forex) is a global decentralized Financial market where currencies are traded one against the other. The Forex market is a vast financial market, the largest in the world, with daily volumes of more than $5 trillion.

 

What is the Forex Market?

Forex is an acronym for FOReign Exchange and it is a global market where currencies are traded one against the other, forming currency pairs (EUR/USD, USD/JPY, etc.). The Foreign Exchange market is not situated at a specific physical location, it is operating without a central service the same way as the world-wide-web (internet). The Forex transactions are placed and executed via the Electronic Network of Banks (ECN) through phone or via the Internet.

Breaking-Down Volume Activity

The highest daily market activity takes place in the UK (36%), followed by U.S. (17%) and Japan (6%). The FOREX market operates 24 hours and 5 days a week, from Monday through Friday. 

Chart: Forex Market Activity 

The Forex Spot Market

The Forex Spot Market was introduced in 1971. Forex Spot or Cash Market means trading at whatever the price is at the moment. Payments for import and exports of goods and services are made through the Foreign exchange market. This part of the market is called the consumer Forex market.The Forex market consists many different participants including Central, Banks, Commercial Banks, Investment Companies, Brokers, Commercial Firms, Institutional and Retail Investors, etc.

The Retail Forex Market

The interbank retail Forex market for small speculators begun in 1994. Later, in 1999 FXCM started to break down large interbank units into small units and gave birth to the retail Forex market as we know it today. For the first time, small individual traders had the opportunity to trade in the Foreign Exchange market.

 

History of the Foreign Exchange Market

This is a brief history of the Foreign Exchange market.

The Bretton Woods Accord in 1944

The establishment of the Bretton Woods Accord in 1944 is generally accepted as the beginning of Forex market. It was established to stabilize the global economy after World War II. It not only created the concept of pegging currencies against one another but also led to the creation of the International Monetary Fund (IMF). Currencies from around the world were pegged against the US Dollar which were in turn pegged against the value of gold in an attempt to bring stability to global economic events. In 1971, the Bretton Woods Accord finally ended. However, it did manage to stabilize major economies.

Free-Floating Currencies after 1971

Late in 1971 and 1972, two more attempts were made to establish free floating currencies against the US Dollar (namely the Smithsonian Agreement and the European Joint Float). The Smithsonian Agreement was a modification of the Bretton Woods Accord with allowances for greater currency fluctuations while the European Joint Float aimed to reduce the dependence of European currencies upon the US Dollar. After the failure of each of these agreements, nations were allowed to peg their currencies to freely float and were actually mandated to do so in 1978 by the IMF. The free-floating system managed to continue for several years after the mandate, yet many countries with weaker currency values failed against those countries with stronger currency values.

The European Monetary System in 1978

European currencies were among those that were affected the most by the strength of stronger currencies such as the US dollar and the British pound. In July of 1978, the European Monetary System was created to counter the dependency on the U.S. dollar. It became increasingly clear by 1993 that this attempt had failed. Shortly thereafter, retail currency trading opportunities, as we know them today, started to be enjoyed not only by those familiar with the Foreign Exchange Market but also by small investors willing to take similar risks like the banks and large financial institutions.

The Impact of Devaluation in 1997

By the late 1990s, stability issues increased in Europe as did major financial problems in Asia. In 1997, there was a major currency crisis in Southeast Asia. Many of the countries’ currencies were forced to float. The devaluation of currencies continued to plague the Asian currency markets. Confidence in trading the open Asian Forex markets was failing. Those currencies that had continued to be valued relatively higher remained unchanged and kept the concept of trading currencies out of those economically strong nations.

The Introduction of the Euro in 1999

Though Europeans were already very comfortable with the concept of Forex trading, this trading arena was still unfamiliar territory to the rest of the world. The establishment of the European Union later gave birth to the euro in 1999. The euro was the first single currency used as legal tender for the member states in the European Union. It became the first currency able to rival the historical leaders such as United States of America, Great Britain, and Japan in the Foreign Exchange market. It created the financial stability that Europe and the Forex market had long desired.

 

The Foreign Exchange Market History

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Sources:

  • TradingCenter.org
  • Wikipedia.org
  • Ten Keys to Successful Forex Trading {Jared Martinez} 

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