foreign exchange market

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forex, FX, or currency market) is a worldwide decentralized over-the-counter financial market for the trading of currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends.

The purpose of the foreign exchange market 'Forex' is to assist international trade and investment. The foreign exchange market allows businesses to convert one currency to another foreign currency. For example, it permits a U.S. business to import European goods and pay Euros, even though the business's income is in U.S. dollars. Some experts, however, believe that the unchecked speculative movement of currencies by large financial institutions such as hedge funds impedes the markets from correcting global current account imbalances. This carry trade may also lead to loss of competitiveness in some countries. [1]

In a typical foreign exchange transaction a party purchases a quantity of one currency by paying a quantity of another currency. The modern foreign exchange market started forming during the 1970s when countries gradually switched to floating exchange rates from the previous exchange rate regime, which remained fixed as per the Bretton Woods system.

Forex News Trading

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Traders on the Foreign Exchange market, Forex market for short, can potentially make thousands of dollars based on the volatility and fluctuations of a country’s currency. To better themselves and have a leading advantage over other traders, some Forex traders and investors participate in a practice known as news trading. The risks are very high, but the potential gains can be worth thousands of dollars and many traders and investors use this technique.

The technique of news trading is quite simple. It is the trading of foreign currency immediately before or after an important economic news announcement. After such announcements, there is a high possibility that market prices will fluctuate, either for the better or worse, depending on the announcement. For example, if the U. S. Federal Reserve announces another increase of the interest rate, many traders might invest in the U.S. dollar as it is expected that its value will appreciate. The main advantage of news trading is the potential for a country’s currency to make huge gains or losses in very little time. Within minutes of an economic announcement, a country’s currency can gain or lose one hundred points almost instantly. The potential of huge profits attracts Foreign Exchange traders and investors, however there are various risks associated with news trading.

Like any investment, there is always a risk, and news trading on the Forex market is no different. Though the potential profits are huge, the losses are also equally as large. The dangers of news trading come from the fact that a trade must be made quickly or else you are going to lose. If you are caught on the bad side of a trade, your money will be gone quicker than you can blink your eye. You will lose money so fast that there won’t even be time for you to manually close your trades, leaving you with nothing. Stop-loss orders are also potentially dangerous as there is a high probability of slippage because of the sudden price fluctuation.

The Key Currency:FOREX

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The hostility of the less developed countries to the Group of Ten and its 'monopoly power' reflects at once their awareness and their intense resentment of this fact.

On the other hand the Group of Ten--- which itself includes some currencies in a minor key--- has not been all that effective in arriving at the kind of collective responsibility for the system that Montagu Norman and Benjamin Strong thought they had achieved in the 1920s, or that the 'key currency' school thought was achievable on the basis of latter-1930s' experience.

The fundamental reason has been that the overwhelming dominance of the dollar through most of the postwar II period has enabled the other currencies to coast intellectually on the basis of carping about the behavior of the United States, while concerning themselves less about the system as a whole than about their own position in it.

When the U.S. Administration finally tired of the burden of holding the umbrella for the rest and challenged them to display some genuine leadership out of the impasse that resulted, it was the United States that by good poker-playing exercised all the leadership that was displayed.

But whether skill in winning at poker redistributes the stakes in an economically desirable fashion is not a question to which economists have ever been willing to return an affirmative answer.

Since one key currency now exists by virtue of postwar II history and both the other alternatives will have to be created by deliberate agreement among sovereign national states at a considerable cost to themselves in terms of economic policy autonomy, there is a strong historically-based probability that the one-key-currency system, otherwise known as the dollar standard, will prevail.

An alternative outcome depends either on the mismanagement of the dollar continuing and being sufficiently offensive and disruptive to the other major countries to prompt them to a defensive establishment of a rival European currency; or on the responsibilities of the key currency role becoming sufficiently onerous to the U.S. Administration to prompt it to force the pace of evolution of the Special Drawing Rights (SDR) system. 'Benign neglect' of the U.S. balance of payments by a President anxious for re-election points in the former direction; the current U.S desire for exchange rate freedom points in the other.

But inertia in the absence of crisis may carry the day. The confidence problem in a fixed exchange rate system in which reserve assets are gold, to a certain extent, same with currencies convertible into gold has two aspects: the possibility of loss of confidence in the ability of a particular country to maintain its existing exchange rate--- which may be speculation on either devaluation or revaluation; also true with the loss of confidence in the ability of the reserve currency country to maintain its exchange rate, which is inevitably speculation on a devaluation relative to gold or the other currencies in general.


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