Forex: Part II
I’ve been spending some time studying the foreign exchange market. I’ve discovered some interesting facts concerning the economics. I’ve also discovered once again that what we are taught is schools really doesn’t prepare us to be successful when it comes to economics.
That what a lot of people believe about the value of money, and trade is pure nonsense. That many big fund managers, and others controlling investment pools, and investing retirement accounts do not know how to take advantage of the markets.
In fact, one may say that there is a difference between investing and trading. Traders get in the market with a set goal, if the goal is met, they take the reward and get out, then look for another opportunity. However, sometimes the market goes against their goal. If it does, the trader has already set the limit, and once that limit is reached; the trader will get out of the market cutting their losses. The trader will not look back, but will move forward for another potential opportunity.
Participating in the foreign exchange market True_george has learned that every country on the planet have to convert their currency to the United States dollar if they want to do any type of international business, like buying oil or other commodity. That the gold standard was abandoned over hundred years ago, and that the only thing that gives value to the United States Dollar is the full faith and credit of the United States Federal Government.
I suppose one may see why the U.S is considered a power house. Not because of its military might, but because of its economic might.
Well, let’s not go off track here; now, I’ve given a run down of the basics or the foreign exchange market before; click here to check it out. Now let’s diverge into it a bit more.
The basic way to understand what the foreign exchange market is all about, is to consider this scenario that is played out every day.
Jack decides to go on vacation and visit New Zealand. Before he boards the plane, he exchanges his US dollars to the for New Zealand dollars. Depending on the exchange rate, Jack will receive more or less New Zealand dollars.
Jack returns to the US; and he exchanges his remaining New Zealand dollars back to US dollars. Jack will receive more or less US dollars depending on the exchange rate.
So now you understand that the foreign exchange market is buying one currency and selling the other. A profit made when the value of the currency you brought goes up and you sell it.
Now historically the world’s central bank used to support their currency allowing people to convert the currency into gold.
Supporting currency with gold was abandoned in 1914, which at the time World War I was raging through Europe.
With the onset of the Great Depression, and World War II; in mid-1944, I suppose the Allies were certain that the defeat of the Third Reich was eminent, 44 nations held a meeting in Bretton Woods, New Hampshire, to establish a new international monetary fund.
The participating nations would draw on the experience of using the gold standard, and the lessons of the Great Depression, and establish funds for post war reconstruction.
It all boiled down to establishing the US dollar as the world’s central currency and pegging it to gold. Establishing that one ounce of gold is equal to 35 US dollars.
The system was in place until 1971 when the US President suspended the pegging of the US dollar to convertible gold. Establishing that the value of the dollar is backed by nothing but the full faith and credit of the US Federal government.
Now today, the exchange rates are driven by supply and demand, allowing a free adjusting of rates.