Skillsfirst Level 5 Diploma in Financial Trading (RQF) - Module 1 - Trading Introduction
Skillsfirst Level 5 Diploma in Financial Trading (RQF) - Module 2 - Financial Products
Skillsfirst Level 5 Diploma in Financial Trading (RQF) - Module 3 - Economic Principles
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WHAT IS THE FOREX MARKET?

WHAT IS THE FOREIGN EXCHANGE MARKET?

The Foreign Exchange Market (commonly referred to as the Forex Market) is the market place for global currency deals, and is the largest most liquid market in the world. The Forex market provides a vehicle where the currency of one country can be exchanged for that of another country through a floating exchange rate system. The Forex market unlike many other assets has no fixed location, so as such it is not a market in the traditional sense. The Forex market instead is an electronically run market based on the large network of hundreds of major banks and their global offices.

Currencies have been an important part of our history because in the old days bartering (swapping goods) was the common method of exchange. However, this method of exchange made it very difficult to quantify value. Various methods of currency were tried such as using shells but eventually coins were made from metal and they became the founding principle of currency that we use today.

The FX market though had its difficulties in history particularly in the 20th Century as exchange rates were fixed or remained constant based on the amount of gold for which they could be exchanged. This practise was known as the gold-exchange standard. Under this system, the value of all currencies was fixed in terms of how much gold for which they could be exchanged. For example, if one ounce of gold was worth 10 British pounds or 20 US dollars, the exchange rate between dollars and pounds would remain constant at two to one.

There were many advantages of the gold-exchange system:

  • It served as a common measure of value.
  • It helped keep inflation in check by keeping money supply in the gold-exchange standard economies fairly stable.
  • Long-term planning was easier as rate changes were infrequent.

This system began in 1944, when the allied nation leaders met at Bretton Woods, New Hampshire, to set up a stable economic structure after the chaos of World War II. The US dollar was fixed at $35 per ounce of gold and all other currencies were expressed in dollars. The Bretton Woods system however began to break down during the 1960s, when foreigners accumulated large quantities of US dollars from post-World War II aid, and from sales of their exports to the United States.

There were genuine worries whether the US held enough gold to redeem all the dollars. Gold reserves were falling steadily and the US could no longer sustain the system so in 1971 US President Richard Nixon decided to abandon it. He declared that the US dollar would no longer be convertible into gold. Nixon’s action meant by 1973, currency became bound by a system of floating exchange rates which still exists today. Currencies under the floating exchange rate system rise and fall in value according to the forces of demand and supply.

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