The Role of Currency and Foreign Exchange Markets

by admin on March 6, 2011

The role of currency is only as a tool or a means of exchanging goods. It’s value is derived from the faith people have in the currency. For any currency to have a value, people must be able to accept it as a means which they will part or exchange other items for it. In itself, currency has no value. It is only how we perceive currency that gives it value.Currency

In today’s world, currency is bought and sold in the international currency market or foreign exchange market for those not in the financial sector. National currencies are valued independently due to the nation’s central banking system which is independent from one another. However each currency in today’s market, from the strongest to the weakest are all dependent and interconnected with each other for purposes of value and stability. The trading between national currencies is important in the overall value of a single country’s currency. How active the foreign exchange market also tells the story of what the financial community thinks of the global economy at that time. The foreign exchange is often the barometer for influences on the world economy as it is often the first market to react whenever there is a dip or boom in the global economy.

The foreign currency market is also always open. For instance, when the currency markets open in Europe, its counterpart in Asia will be winding down to a close. As the European market closes, the American market opens and so on and so forth. This trading cycle continues throughout the day making it the most active market in the world. People are always conscious of money. Whether they are keeping track of these markets or visiting the site lovemoney.com to find some money saving tips, it is something that remains at the forefront of many people’s minds.

The players who are big in foreign exchange market are banks, large commercial entities hedge fund, investment firms and central banks of the nations. Hedge funds and central banks are the two biggest influences on the foreign exchange market. Although not all central banks do it, but some central banks do trade in the foreign exchange market. They do this for a multitude of reasons. Among the reasons include synchronizing the country’s interest rates in line with the other countries and to stabilize the currency of the country so that the import and export of goods can be completed in an orderly manner. Some central banks also use the foreign exchange market to control fiscal issues like inflation.

On the other hand, hedge funds represent the purely commercial side of the foreign exchange market. Hedge funds trade in the market with the sole purpose of taking advantage of anomalies and market huge profits sometimes even at the expense of destabilizing a nation’s currency.

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The Role of the US Dollar in the World Economy

by admin on March 2, 2011

Since 1944, when nations around the world ratified the Bretton Woods Agreement, the US dollar has been the most dominant currency in the world.

DollarThe Bretton Woods agreement was a bid to prevent the protectionist policies from the 1930’s repeating itself and leading to world economic depression. The basic principle of the Bretton Woods is simple. The US dollar is the defacto world currency and other nations just peg their currency to the US dollar. The US dollar in turn is backed by the gold reserves with the promise of redeeming dollars for gold anytime. Being back by the precious commodity, the US dollar provided other nations with a hard currency which they could keep as reserves and a means to settle international trade transactions. Everyone in the world accepted the US dollar as payment for transactions.

However, this system eventually came to an end in the year 1970 because the US’s widening trade deficit led to fears on the weakness of the dollar. The fixed rate system was then replaced with floating rate system where the value of each currency is allowed to be value by market forces. In today’s world, the role of currency reserves is not longer confined to settling international trade differences but also used as investment funds and protection against currency market speculators.

Although most countries no longer pegged their currency, the role of the US dollar in world economy is still very prominent. It is still the defacto reserve currency held by almost two thirds of international central banks. This status as the reserve currency means that most commodities are priced and traded in US dollars. In order to make the transaction, US dollars must be used. Therefore, it is key that the US dollar maintains its role and strength in the world currency market.

In recent years however, the size of the US trade and budget deficit along with its gigantic national debt has prompted many to question if the world’s strongest economy can maintain the dollar as the reserve currency. This is couple with the fact that the Euro, currency of the European Community has become much stronger since its introduction. With the Euro as a viable alternative to the US dollar, the role of the US dollar as the reserve currency is under threat with many international companies choosing to trade in the Euro rather than the dollar. As the private sector moves against the dollar, it won’t be long before the US dollar loses its status among the international central banks as well.

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