More Money Made Simple

Forex trading is in essence the investment in the currency of one country.  Large global corporations that do business in many nations find value in keeping their cash reserves in a range of nations, and holding their funds in a mixture of ways.  For example, a US company may have a proportion of its working capital in US dollars, but if it does quite a bit of business in Europe may also find it advantageous to keep a percentage of its money in Euros, in European banks.  Over the years, many individual investors have discovered that there is profit to be made in speculation in the currency markets.

As an example, during the 1970’s the German deutchmark was changing swiftly in value.  It was worth anywhere from 1.7 marks to the US dollar to 2.5 US marks to the dollar.  When the mark was worth 2.5 it was beneficial to spend dollars buying marks, since the mark would buy more goods or services at that rate.  When the mark was only worth 1.7 to the dollar there was less incentive to buy it.

The Forex market itself is not integrated. There are many small Forex markets that specialise in trading specific currencies.  The most frequently traded currencies are the American dollar, the Australian dollar, the British pound sterling, the Japanese yen, and the European Euro.  The values of these currencies will vary depending on the market in which an investor is looking, so there is in reality no such thing as a single, unified dollar rate, but in its place there are several dollar rates, which are different according to the market where the trade is taking place.  The main exchanges for Forex trading are London, New York and Tokyo. With trading in these locations, speculators have 24 hour access to the markets, since Asian, European and then the American markets dovetail each other in a 24 hour cycle.

The most commonly traded currency is the US dollar, involved in 89% of all trades.  This is followed by the Euro involved in 37% of all trades, then by the yen in 20% and the pound in 17%.  The fastest rising currency in trade is the Euro, but the US dollar is still widely considered the anchor point, and the currency to watch to determine how others will react. The differences in value of the highest traded currencies form the daily news; especially if trading patterns have forced the prices significantly in one direction or the other. Changes in GDP (gross domestic product) growth, in inflation, interest rates, budget and trade deficits, surpluses and other economic conditions can cause changes in currency values. For this reason, Investors and traders follow the news very carefully. In fact, there are 24 hour cable news channels and many web sites dedicated to news of importance to currency traders.

In recent years, Iran removed its currency from European Investment Banks. The reason for doing so was in anticipation of rising world tensions, under which circumstances their currency could become susceptible to asset freezing and economic warfare, of which Forex trading could be a part.  The Forex market is very vulnerable to rumours.  In fact the central banks of some countries have at times manipulated the value of their currency by spreading rumours about hikes in interest rates and other economic news that could have an influence on the value of the currency. When this news is untrue it is called a dirty float.