Understanding Foreign Exchange Markets

The gold standard is an agreement between countries to buy and or sell gold for a determined number of currency units for the agreed weight of the gold being exchanged. During the early 1900’s through WWII, this method was used to exchange gold; however, this has not been the case for many years and is no longer the international financial structure. When the gold standard was created, any given country could not print or make any money unless it was financed by gold. Jacques Rueff disputed that this would be the only solution to control inflation of exchange with other countries.


Today many still argue that the gold standard should return, because currently other countries cannot increase their reserve unless the U.S. also creates an increase. This is referred to as a balance of payments or BOP deficit. Any given countries BOP are extremely important to that countries economy and market measures are taken to stop the collapsing economy or the devaluing of the countries currency.

It can be seen in history that dating back to 1200 A.D to current time’s gold has had a steady increase in value. As any other investments there have been some difficulties but gold has been one of the safest investments. One interesting fact to note is that between the years of 1933 and 1976 it was illegal for individuals in the United States to own any gold bullion. The roots of setting the price of gold can be traced back to England.

On December 22, 1717, Sir Isaac Newton, master of the English mint, established the price of gold at 3 pounds, 17 shillings, 10.5 pence per ounce. From that, point on England could be considered the standard on gold pricing up until World War I. Due to the monetary strains of the war England was forced to get rid of a large portion of its gold and therefore the gold standard ended.


Later on in history, we would see the next World War would pretty much halt any consideration for the gold standard or any other monetary system. At the same time there were many in government that believed there had to be some type of scheme had to be implemented once there was peace. After the war had ended officials of the major allied powers met at Bretton Woods, New Hampshire to shape the future of monetary exchange.

In order for there to be any success the Bretton Woods Conference established the International Monetary Fund (IMF). The IMF’s main goals were to promote a system of logical foreign exchange measures, convertible currencies, and to ensure that payments are made on a timely basis. The IMF was founded before the United Nations, therefore after the UN was created the IMF created a bond with the UN. At the same time though the IMF still maintained its freedom, which was chiefly because the monetary system needed an independent monitor. Of course, this was put in place to ensure that no country can overspend and cause inflation.

Some very essential changes in the IMF’s actions and responsibilities came during the 1970s and 1980s. During this period article IV was enacted which authorized the IMF to have strict scrutiny over exchange rate rules of members. This is done two very simple ways which is their board of governors routinely examines economic procedures and presentation these procedures in conjunction with other countries. The other way they can scrutinize other members is by customary deliberations, which cover global economic points of view and sporadic negotiations on exchange rate expansion in the most important industrialized countries.


There is one major glitch with the IMF is that the member-nations usually are deficient in any political muster in order to exact any economic tribulations. The IMF has found a way the best way to utilize their finances is by cooperating with the World Bank and with borrowing member-nations. This system is referred to as structural adjustment facilities (SAFs). To ensure that if situations arise that are larger than the SAF can handle they formed the enhanced structural adjustment facilities (ESAFs).

Member nations have lending institutions known as multilateral development banks. They work primarily with developing countries. The main goal is to encourage moneymaking and society advancement in developing member-nations by providing loans, technical assistance, capital investment, and help with economic development plans. MDBs usually refer to five major growth banks globally, which are the International Bank for Reconstruction and Developments also better known as the World Bank and the four regional growth financial institutions: the African Development Bank, the Asian Development Bank, the European Bank for Reconstruction and Development, and the Inter-American Development Bank Group.

In order for anyone to invest money into a country or purchase foreign goods, you must get your hands on the money from the country that you are intending to do business with. Many exporters in the world will demand that you compensate for their merchandise in either their legal tender or in United States dollars (USD). USD are generally accepted everywhere you go in the world. This is one of the founding principles of the Foreign Exchange Market.


The Foreign Exchange Market otherwise known as the Forex market is the nucleus of buying and trading of money in the world. The Forex market is known to be the largest financial market in the world where they have seen trading volumes skyrocket as high as 1.5 trillion USD in a single day. For the most the commercial or for profit banks are the major traders that are found in this market. There are five major areas for Forex trading. These are all based in Tokyo, London, Zurich, Frankfurt, and New York.

The Forex market is comprised of a global arrangement of chiefly interbank brokers, which are linked technology such as phone and internet. On a daily basis traders are found trying to settle between each other and the consequential market ask/bid price for any currency. All of this information is constantly updated into computer systems and then displayed on authorized quotation monitors. Forex exchange rates quoted between banks are referred to as Interbank Rates.

Exchange rates on the Forex market are quoted as two-tier “bid/ask” rates. For example, a U.S. dollar/Japan yet quote may be articulated as 1.9000/20. The trader who has stated this price is agreeing to purchase yen at 1.900 and then willing to sell yen at 1.9020. The difference between the purchase and the sale rates is called the “spread” and represents the expected profit to the Forex trader on the transaction. The spread is dependent on a certain currencies abilities. These abilities are depending on whether the currency is strong or weak and whether the particular currency is unpredictable or not.

The common person is not able to obtain foreign money at Forex rates unless they are qualified Forex traders. Odds are that most people will obtain foreign money through a bank which will add on their own fees so that the can make a profit. There is one definitive area of concern in the USD and that is the current account deficit.

In 2002, the current account deficit had ballooned to a whopping 465 billion. The implications of this is that the United States need to This means that the United States needs to bring in at least $1.3 billion in foreign finances daily in order to avoid the USD from declining and the biggest problem for America is that foreign finances were declining near the beginning 2002. This trend continued onto 2003 and into 2004, which saw the subsequent decline in the USD. Eventually the USD has to be exchanged for the required yen and pounds. The essential principle workings and the daily rates of exchange is done by the international monetary system. The currencies mentioned above are convertible currencies (that is, they are readily convertible in the market), but most currencies are not. In most developing countries, their currencies will not be considered convertible and if they are it can only be done lawfully at false, government-controlled rates.

Foreign currency exchange markets are a very complicated but effective means of dealing within international business. As seen, though out history there have been many changes in the systems used to deal with foreign business. One of those that are extinct today is gold which has panned out not to be the best method. With the advent of technology foreign business and investment has become increasingly easier and has a promising future.

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