Foreign Exchange Markets Summary

As Americans our nation has been protected from role of money as a commodity. Americans enjoyed a world where the dollar was the main currency of exchange and stability throughout the last half of the Twentieth Century. European citizens frequently travel to a next-door nation whose currency is entirely different than their own and where their own currency would not be accepted, and American’s travelling to Canada or Mexico could be fairly sure merchants would accept their Dollars. As the first decade of the 21st Century now draws to a close, on the other hand a shock may be in store for Americans. The U.S. Dollar may no longer be the main currency of exchange in the world and may no longer be such a desired currency to hold.

Many people would ask how and why a currency increases or decreases in value, the effects are to be considered when looking at gold standard. Money, although often thought of as only a medium of exchange, has a value of its own and is also a commodity, in the same way as oil, gold, silver, or corn are commodities (Feiler, Schilling). The price of money as a commodity is often determined or set as a result of government action and international trade. Value is determination by the foreign exchange markets of the world. The foreign exchange rates have a lot to do with it as well for example; Exchange rates respond directly to all sorts of events, both tangible and psychological—business cycles; balance of payment statistics; political developments; new tax laws; stock market news; inflationary expectations; international investment patterns; and government and central bank policies among others.( Federal At the heart of this complex market are the same forces of demand and supply that determine the prices of goods and services in any free market. If at any given rate, the demand for a currency is greater than its supply, its price will rise. If supply exceeds demand, the price will fall. (Federal Bank of New York) Foreign exchange trades can occur in a stock market, similar to the Chicago Board of Trade. Normally it is the major banks in each major nation, such as the Bank of London, the Federal Reserve Bank of New York, and the Bank of Tokyo, which help exchange one currency for another and through their purchases of currency “reserves” help set the “price” of all currencies.