WASHINGTON, March 6, 2014 — How may people have returned home from a vacation abroad and wondered what to do with the “extra” euros, pounds or yen they found in the bottom of their suitcase? Typically, the foreign currency is tucked away in a special place for the next time they venture abroad. Some savvy investors have found a way to profit from the exchange-rate fluctuations between foreign currencies.
CommexFX Explains Forex Trading
In the early 1900s, converting currencies from different countries was a risky and speculative transaction, usually done by multi-national companies in concert with large trading houses. Smaller sums — anyone got change for a million? — usually ended up in a barter exchange where products or services would be given instead of money. These products would then be sold and, with luck, the company or individual would recover their money.
All this changed after World War 2 with the introduction of the Bretton Woods Accord, which pegged all government currencies to the U.S. dollar (USD). Now, in addition to being given a universal rate of exchange on every foreign currency, the possibility opened up to trade the actual currencies themselves. With Europe in tatters, this single accord was a driving force in the reconstruction of war devastated communities and infrastructure.
All that Glitters is a Gold Standard
At the same time, the value of the U.S. dollar was tied to the price of gold, which at the time of the Bretton Woods Accord was valued at $35 an ounce. The U.S. government was obligated to maintain gold reserves equal to the amount of currency in circulation, making the United States a true gold standard economy. The idea was that by linking the USD to gold and all currencies to the USD, Bretton Woods would create stable financial markets for trade.
While Bretton Woods did create stability, it came with unintended consequences for both foreign governments and the U.S. Countries did not like being “tied” to a USD, which hampered their ability to address local financial problems, and the U.S. was stuck with a dollar that rose with the price of gold. This made foreign countries unable to set their currency and the U.S. with a dollar that made trade more expensive. A further problem was that by making the dollar the world’s reserve currency, Bretton Woods encouraged countries to hold large dollar reserves rather than using dollars to buy American goods, putting the U.S. in near perpetual trade deficit.
Inflation: The Real ‘70s Show
In the early ‘70s, energy prices began to skyrocket, and newly flush Petro-States like Saudi Arabia and Iran began to convert their dollar holdings into gold. This put a serious strain on U.S. gold reserves, and to stop the outflow of gold, the U.S. stopped backing the dollar with gold. The price of gold was allowed to float, it quickly rose, and the exchange value of the dollar plummeted.
Against this backdrop Forex Trading (Foreign Exchange Trading) began in earnest with two main branches: Interbank and Over The Counter (OTC) trading. Interbank trading consists of a small group of banks that exchange large amounts of currency for financial, energy, and other industries. You need a lot of money to get into this so most traders speculate on the OTC market.
It Takes Two to Tango
Forex trading in the OTC market is not conducted in a physical location such as a stock exchange, and is essentially a contract between two parties. If a buyer wants to purchase dollars with British Pounds (GBP), the trader buys a GBP/USD pair. They are buying GBP at the same time someone is buying USD.
The first currency in the pair (GBP) is called the base currency; the second (USD) is called the quote or counter currency. When selling a currency pair, the exchange rate shows how many units of the quote currency you will receive when selling one unit of the base currency. In this example the calculation could be GBP/USD = 1.642 which indicates one pound can buy 1.642 US dollars.
CommexFX Deems Forex Virtually Unstoppable
Currencies fluctuate based on a number of factors, most notably economic performance, trade volume, and political instability. A poor financial result or terrorist act in a country can cause a currency to swing wildly, regardless of its underlying strength. After a national tragedy like 9-11, fortunes can be made and lost.
According to CommexFX, the rise of Internet trading has given investors the chance to manage accounts from the comfort of their home or office. This has resulted in more people entering the market and more trades being made daily. As they say, “in for a penny … until you buy a pound.” CommexFX provides a tantalizing alternative for travelers the next time they come home with those “extra” foreign currencies: Forex.