The
Currency or Foreign Exchange (Forex or FX) market has
been around since the time of the pharaohs in Egypt.
Even during the middle ages there were forms of currency
trading. After WWII, the Bretton Woods Accord was established
to help stabilize the global economy.
During this time,
speculation in the various national currencies helped
to destabilize the currency market. This accord limited
the flow of currencies from one country to another and
valued their currency to that of the U.S. Dollar. At
that time, the U.S. Dollar was valued against a certain
amount of gold, which was called the “Gold Standard”.
In 1971, the
U.S. Dollar abandoned the gold standard which created
an increase in the amount of currency trading. During
this same time, the Smithsonian Agreement was created
and in effect until 1973 when it failed. It was during
this time, that the Currency market, as we know it, came
about. The current “Free Floating System” began
and opened the door for individuals to take advantage
of trading in foreign currency markets. Now that the
personal computer and internet are readily available
to all, the foreign exchange market is giving individual
traders the opportunity to take advantage of currency
trading.
Today, the Foreign
Exchange market is the largest financial exchange in
the world, trading between $1.5 and $2.0 trillion each
day. This is substantially more volume than all the volume
in the U.S. markets combined. The FX market transactions
are conducted between two counterparts over an electronic
network.
Who trades in
the FX Market?
• Governments and Central Banks
• Banks
and Investment Banks
• Hedge Funds
• Businesses
• Investors
and Speculators
Take a look at
part of the annual report for Berkshire Hathaway (Warren
Buffet’s Company):
In 2004, they
made $870 million in pre-tax gains with their common
stock compared to $1,839 million in their foreign exchange
contracts. That is more than twice the amount they made
with stocks. Most large banks and other institutions
have similar numbers and results. For instance, Bank
of America made more than twice as much in the foreign
exchange market as it did with its equity business.
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