of the Foreign Exchange
1.1. Foreign Exchange - Financial Market
Currency exchange can be attractive for both corporate and individual
traders who trade in the Forex
- a special financial market assigned for the foreign exchange. The
following features make this market different in comparison
to all other sectors of the world financial system:
Heightened sensibility to a large and continuously changing
number of factors:
Accessibility to all traders in the major currencies;
*Increased liquidity of the major
*Increased consideration for several
Round-the clock business hours which enable traders to deal
after normal hours or during national holidays in their country
finding markets abroad open and extremely high efficiency relative
to other financial markets.
On the KineticFXTrading MetaTrader 4 platform spreads
are competetive, but will vary depending upon market conditions.
Exchange - Historical Perspective
Currency trading has a long history and can be traced back to
the ancient Middle East and Middle Ages when foreign exchange
started to take shape after the international merchant bankers
devised bills of exchange, which were transferable third-party
payments that allowed flexibility and growth in foreign exchange
The modern foreign exchange market characterized by the consequent
periods of increased volatility and relative stability formed
itself in the twentieth century. By the mid-1930s London became
to be the leading center for foreign exchange and the British
pound served as the currency to trade and to keep as a reserve
currency. Because in the old times foreign exchange was traded
on the telex machines, or cable, the pound has generally the
nickname “cable”. In 1930, the Bank for International Settlements
was established in Basel, Switzerland, to oversee the financial
efforts of the newly independent countries, emerged after
World War I, and to provide monetary relief to countries experiencing
temporary balance of payments difficulties.
After World War II, where the British economy was destroyed
and the United States was the only country unscarred by war,
U.S. dollar became the prominent currency of the entire globe.
Nowadays, currencies all over the world are generally quoted
or paired against the U.S. dollar: e.g. EUR/USD
of Foreign Exchange Development
The main phases of the further development of the Forex in modern
Signing of the Bretton Woods Accord;
Constitution of the international monetary fund (IMF);
Emergency of the free-floating foreign exchange markets;
Creation of currency reserves;
Constitution of the European Monetary Union and the European
Monetary Cooperation Fund;
Introduction of the Euro as a currency. (Previously the
Bretton Woods Accord
in July 1944 by the United States, Great Britain and France
which agreed to make the currency market stable, particularly
due to governmental controls on currency values. In order to
implement it, two major goals were: emphasized: to provide the
pegging (backing of prices) of currencies and to organize the
( See last page for in-depth study of Bretton Woods
In accordance to the Bretton Woods Accord, the major trading
currencies were pegged to the U.S. dollar in the sense that
they were allowed to fluctuate only one percent on either side
of that rate. When a currency exceeded this range, marked by
intervention points, the central bank in charge had to buy it
or sell it, and thus bring it back into range. In turn, the
U.S. dollar was pegged to gold at $35 per ounce. Thus, the U.S.
dollar became the world's reserve currency. The purpose of IMF
is to consult with one another to maintain a stable system of
buying and selling the currencies, so that payments in foreign
money can take place between countries smoothly and timely.
The IMF lends money to members who have trouble meeting financial
obligations to other members, on the condition that they undertake
economic reforms to eliminate these difficulties for their own
good and the good of the entire membership. In total the main
tasks of the IMF are:
To promote international cooperation by providing the means
for members to consult and collaborate on international monetary
To facilitate the growth of international trade and thus contribute
to high levels of employment and real income among member nations;
To promote stability of exchange rates and orderly exchange
agreements, and to discourage competitive currency depreciation;
To foster a multilateral system of international payments and
to seek the elimination of exchange restrictions that hinders
the growth of world trade;
To make financial resources available to members, on a temporary
basis and with adequate safeguards, to permit them to correct
payment imbalances without resorting to measures destructive
to national and international prosperity.
To execute these goals the IMF uses such instruments as Reserve
tranche which allows a member to draw on its own reserve asset
quota at the time of payment, Credit tranche drawings and stand-by
arrangements are the standard form of IMF loans, the compensatory
financing facility extends financial help to countries with
temporary problems generated by reductions in export revenues,
the buffer stock financing facility which is geared toward assisting
the stocking up on primary commodities in order to ensure price
stability in a specific commodity and the extended facility
designed to assist members with financial problems in amounts
or for periods exceeding the scope of the other facilities.
Since 1978 free-floating
were officially mandated by the International Monetary Fund.
That is the currency may be traded by anybody and its value
is a function of the current supply and demand forces in the
market, and there are no specific intervention points that have
to be observed. Of course, the Federal Reserve Bank irregularly
intervenes to change the value of the U.S. dollar, but no specific
levels are ever imposed. Naturally, free-floating currencies
are in the heaviest trading demand. Free-floating is not the
sine qua non condition for trading. Liquidity is also an indispensable
condition. A tool for people and corporations to protect
investments in times of economic or political instability is
currency reserves for international transactions. Immediately
after the World War II the reserve currency worldwide was the
U.S. dollar. Currently there are other reserve currencies: the
euro and the Japanese yen. The portfolio of reserve currencies
may change depending on specific international conditions, for
instance it may include the Swiss franc.
The creation of the
European Monetary Union
was the result of a long and continuous series of post-World
War II efforts aimed at creating closer economic cooperation
among the capitalist European countries. The European Community
(EC) commission's officially stated goals were to improve the
inter-European economic cooperation, create a regional area
of monetary stability, and act as "a pole of stability
in world currency markets." The first steps
in this rebuilding were taken in 1950, when the European Payment
Union was instituted to facilitate the inter-European settlements
of international trade transactions. The purpose of the community
was to promote inter-European trade in general, and to eliminate
restrictions on the trade of coal and raw steel in particular.
In 1957, the Treaty of Rome established the European Economic
Community, with the same signatories as the European Coal and
Steel Community. The stated goal of the European Economic Community
was to eliminate customs duties and any barriers against the
transit of capital, services, and people among the member nations.
The EC also started to raise common tariff barriers against
The European Community consists of four executive and
1. The European Commission. The executive body in charge
of making and observing the enforcement of the policies. Since
it lacks an enforcement arm, the commission must rely on individual
governments to enforce the policies. There are 23 departments,
such as foreign affairs, competition policy, and agriculture.
Each country selects its own representatives for four-year terms.
The commission is based in Brussels and consists of 17 members.
2. The Council of Ministers. Makes the major policy
decisions. It is composed of ministers from the 12 member nations.
The presidency is held for six months by each of the members,
in alphabetical order. The meetings take place in Brussels or
in the capital of the nation holding the presidency.
3. The European Parliament. Reviews and amends
legislative proposals and has the power to adopt or reject budget
proposals. It consists of 518 elected members. It is based in
Luxembourg, but the sessions take place in Strasbourg or Brussels.
4. The European Court of Justice. Settles disputes
between the EC and the member nations. It consists of 13 members
and is based in Luxembourg. In 1963, the French-West German
Treaty of Cooperation was signed. This pact was designed not
only to end centuries of bellicose rivalry, but also to settle
the postwar reconciliation between two major foes. The treat
stipulated that West Germany would lead economically through
the cold war, and France, the former diplomatic powerhouse,
would provide the political leadership. The premise of this
treaty was obviously correct in an environment defined by a
foreseeable long-term continuing cold war and a divided Germany.
Later in this chapter, we discuss the implications for the modern
era of this enormously expensive pact. A conference of national
leaders in 1969 set the objective of establishing a monetary
union within the European Community. This goal was supposed
to be implemented by 1980, when a common currency was planned
to be used in Europe. The reasons for the proposed common currency
unit were to stimulate inter-European trade and to weld together
the individual member economies in order to compete successfully
with the economies of the United States and Japan. In
1978, the nine members of the European Community ratified a
new plan for stability—the European Monetary System. The new
system was practically established in 1979. Seven countries
were then full members – West Germany, France, the Netherlands,
Belgium, Luxembourg, Denmark, and Ireland. Great Britain did
not participate in all of the arrangements and Italy joined
under special conditions. Greece joined in 1981, Spain and Portugal
in 1986. Great Britain joined the Exchange Rate Mechanism in
European Monetary Cooperation Fund was established
to manage the European Monetary System’s (EMS) credit arrangements.
In order to increase the acceptance of the European Monetary
Union in Europe, (ECU) countries that hold more ECU deposits,
or accept as loan repayment more than their share of ECU, receive
interest on the excess ECU deposits, and vice versa. The interest
rate is the weighted average of all the EMS members' discount
In 1998 the Euro was introduced
as an all-European currency. There were official locking rates
of the 11 participating European currencies in the Euro (EUR).
The rates were proposed by the EU Commission and approved by
EU finance ministers on December 31, 1998, ahead of the launch
of the Euro at midnight, January 1, 1999.
The real starting
date was Monday, January 4, 1999.
Up until 1995 Forex Trading was only available to banks
and large multinational corporations but today, thanks to the
proliferation of the computer and a new era of internet-based
communication technologies, this market is open to everyone.
The Forex Trading Market's growth has been unprecedented, explosive,
and continues to be unequaled by any other trading market.
While the daily turnover in 1977 was U.S. $5 billion,
it increased to U.S. $600 billion in 1987, reached the
U.S. $1 trillion mark in September 1992, and from 1997
onwards daily forex trading volume has surged and according
to recent studies it has touched $3.2 trillion per day
and dwarfs all other markets for trading in size and volume.
Before the advent of Internet and E-commerce, only big corporations,
multi-national banks and wealthy individuals could trade currencies
in the Forex market through the use of the proprietary trading
systems of banks. These systems required as much at U.S.
$1 million to open an account. Thanks to the advancements
in online technology, today investors with as little as $500
dollars can have access to the Forex market 24 hours a day and
around 5.5 days a week.
The Forex market is a non-stop market where currencies of nations
are traded, typically via brokers called Forex Brokers. Foreign
currencies are constantly and simultaneously bought and sold
across local and global markets while traders increase or decrease
the value of an investment upon currency movements.
an in depth study of Bretton Woods refer to:
The Views and opinions represented in the provided web site
links and resources are not controlled by the RB (Referring
Broker) or the FCM (Futures Commission Merchant). Further,
the RB and the FCM are not responsible for their availability,
content, or delivery of services.
* Without proper risk management, this high degree of
leverage can lead to large losses as well as gains.
Foreign Exchange market conditions can change at any time
in response to real-time events so it is also considered to
be highly volatile and involves risk.