What is Forex?
Forex, which is the short form of Foreign Exchange, is the conversion of the currency of one country to that of another. In a country with free economy, its currency is valued with regard to factors of supply and demand i.e. the value of a currency of a country is pegged on the value of currencies of other countries such as the U.S. dollar. Many countries float their currencies against currencies of other countries therefore making them to fluctuate.
Market forces such as tourism, trade, and investment determines the value of a particular currency. For example, when a tourist visits a particular country, he or she pays for goods and services using the currency of the host country. He or she must therefore exchange her home currency to that of the host country. Such currency exchange promotes demand for a particular currency. Another demand for currency exchange arises when a foreign company wants to do business with a company in a certain country. In this case, the foreign company will have to pay the local company using their local currency. In some cases, an investor may desire to do business in another country which will require the investment to be made in local currency. All these enhance the need for foreign exchange. Just like other goods and services, the value of currencies fluctuates as their demand and supply fluctuate i.e. an increase in supply or decrease in demand for a currency causes the value of the currency to fall and a decrease in supply or increase in demand for a currency causes the value of the currency to rise.
There is always no “inside information” in foreign exchange. The fluctuations in exchange rates are as a result of actual flows of money and the anticipations on the macroeconomic conditions around the globe. The fluctuations in the currency are made public making all interested parties around the globe to receive the information at the same time. There is no single universal exchange for a pair of currencies. Unlike most markets, there is no centralized place where foreign exchange is done. The transactions are done by several participants located in various locations.
History of Forex
The exchange of currency was there during ancient times. People helped others to change money at a commission during the Biblical times. Money changers were also present during the times of silver- and gold-smiths.
During the 15th century, there was need for the family of Medici to open foreign banks to facilitate exchange of currencies for textile traders. During the 17th and 18th century, an active forex market which was done between agents who acted for England and Holland was maintained by Armstadam. During 1850, Alexander Brown and Sons became the leading firm to trade foreign currency in USA and in 1880, J.M. do Espirito de Silver engaged in foreign exchange. The gold standard currency began in 1880. During the period of 1899 to 1913, holdings of gold increased by 6.3% and holdings of countries foreign currency exchange increased by 10.8%. During the time, almost half of the foreign currency exchange was done using the sterling. After 1973, the modern foreign exchange trading began with countries allowing free trading.
