foreign exchange market
The
foreign exchange market (
forex,
FX, or
currency market) is a form of
exchange
for the global decentralized trading of international currencies.
Financial centers around the world function as anchors of trading
between a wide range of different types of buyers and sellers around the
clock, with the exception of weekends.
EBS and
Reuters' dealing 3000
are two main interbank FX trading platforms. The foreign exchange
market determines the relative values of different currencies.
The foreign exchange market assists international trade and investment by enabling
currency conversion. For example, it permits a business in the
United States to import goods from the
European Union member states especially
Eurozone members and pay
Euros, even though its income is in
United States dollars. It also supports direct speculation in the value of currencies, and the
carry trade, speculation based on the interest rate differential between two currencies.
In a typical foreign exchange transaction, a party purchases some
quantity of one currency by paying some quantity of another currency.
The modern foreign exchange market began forming during the 1970s after
three decades of government restrictions on foreign exchange
transactions (the Bretton Woods system of monetary management
established the rules for commercial and financial relations among the
world's major industrial states after World War II), when countries
gradually switched to
floating exchange rates from the previous
exchange rate regime, which remained
fixed as per the
Bretton Woods system.
The foreign exchange market is unique because of the following characteristics:
- its huge trading volume representing the largest asset class in the world leading to high liquidity;
- its geographical dispersion;
- its continuous operation: 24 hours a day except weekends, i.e., trading from 20:15 GMT on Sunday until 22:00 GMT Friday;
- the variety of factors that affect exchange rates;
- the low margins of relative profit compared with other markets of fixed income; and
- the use of leverage to enhance profit and loss margins and with respect to account size.
As such, it has been referred to as the market closest to the ideal of
perfect competition, notwithstanding
currency intervention by
central banks. According to the
Bank for International Settlements,
as of April 2010, average daily
turnover
in global foreign exchange markets is estimated at $3.98 trillion, a
growth of approximately 20% over the $3.21 trillion daily volume as of
April 2007. Some firms specializing on foreign exchange market had put
the average daily turnover in excess of US$4 trillion
From 1899 to 1913 holdings of countries foreign exchange increased by 10.8%, while holdings of gold increased by 6.3%.
At the time of the closing of the year 1913, nearly half of the world's forexes were being performed using sterling.
The number of foreign banks operating within the boundaries of London
increased in the years from 1860 to 1913 from 3 to 71. In 1902 there
were altogether two London foreign exchange brokers.
In the earliest years of the twentieth century trade was most active in
Paris, New York and Berlin, while Britain remained largely uninvolved
in trade until 1914. Between 1919 and 1922 the employment of a foreign
exchange brokers within London increased to 17, in 1924 there were 40
firms operating for the purposes of exchange.
[24]
During the 1920s the occurrence of trade in London resembled more the
modern manifestation, by 1928 forex trade was integral to the financial
functioning of the city. Continental exchange controls, plus other
factors, in Europe and Latin America, hampered any attempt at wholesale
prosperity from trade for those of 1930's London.
During the 1920s foreign exchange the Kleinwort family were known to
be the leaders of the market, Japhets, S,Montagu & Co. and Seligmans
as significant participants still warrant recognition.
[26] In the year 1945 the nation of Ethiopias' government possessed a foreign exchange surplus.
