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The Ins and Outs of the Foreign Exchange Market

The Ins and Outs of the Foreign Exchange Market

by Cherie McCord

Introduction

The origin of the foreign exchange market dates back to ancient Babylonian times when the trade by barter system was practiced. This means of exchange was later replaced by the Gold standard in 1871. Following the Bretton Woods agreement in 1944, the US dollar was therefore elevated to become the standard means of exchange and used to determine the value of other currencies.

This work has exposed all you need to know about the foreign exchange market today. You will also learn from this work, the major factors that move the forex market to guide you while dealing with the foreign exchange market.

What is Foreign Exchange Market?

The Foreign Exchange Market is a global market that allows traders to exchange different currencies. It is a standard exchange platform that connects buyers to sellers, making it possible to exchange various currencies in the market today. The Foreign Exchange Market ranks as the largest financial market in the world today with more than 3 Trillion market capitalization.  The average traded volume in the market ranges above 450 Billion. Almost every day, new traders and investors come into the market increasing both the trading volume and the total capital invested in the foreign exchange market.

Factors that move the Foreign Exchange Markets

The foreign exchange market is largely moved by global factors which traders designate today as Fundamentals. We have discussed these factors below.

  • Interest rate:Investors are usually attracted to a currency when its interest rate is high. Thus, hiking the interest rate for a given currency will create more demands for the currency in the foreign exchange market. The value of the US dollar for instance rose rapidly in the market within six successive months when the Fed embarked on an aggressive interest rate hike for the US dollar.
  • Fiscal Policies: Fiscal Policies refers to the government policies such as taxation and other laws for carrying out business within the country. Increasing the tax rate for instance discourages investors and reduces demand for the currency at the exchange market.
  • Monetary Policies: This refers to the central bank policies in controlling the amount of money in circulation and stimulating economic growth. The major monetary policies carried out by the Central Banks today are: Quantitative easing, Tapering, Interest rate hike, etc.
  • Supply and Demand: The foreign exchange market is largely governed by the principle of supply and demand. When there is a large amount of a given currency in circulation, the demand for that currency reduces automatically and vice versa.
  • Gross Domestic Product (GDP): The GDP is important data that measures the value of goods and services produced within the country over some time. It helps investors to ascertain strong economies for investments. Having a positive GDP attracts investors and increases demand for the currency too. 

How to Trade the Foreign Exchange Markets

The emergence of online brokers has made it possible for individuals to participate in the foreign exchange market from the comfort of their homes. This is no longer the case when the individual will need to visit the banks or move to the exchange market before they can exchange their currencies.

To trade forex today, all the trader needs to do is create an account with the online forex brokers for beginners and fund his account after a successful registration and approval process for him to begin trading.

Is the Foreign Exchange Markets a good investment platform?

The forex market has been a lucrative investment over the years providing investors an opportunity to hedge their capitals against rising inflations.

Filed Under: Crypto and Finance

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