Fx trader exchange rates jamaica
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Given the global nature of the forex exchange market, it is important to first examine and learn some of the important historical events relating to currencies and currency exchange before entering any trades. In this section we'll review the international monetary system and how it has evolved to its current state. We will then take a look at the major players that occupy the forex market - something that is important for all potential forex traders to understand.
The History of the Forex Gold Standard System The creation of the gold standard monetary system in marks one of the most important events in the history of the forex market. Before the gold standard was implemented, countries would commonly use gold and silver as means of international payment. The main issue with using gold and silver for payment is that their value is affected by external supply and demand.
For example, the discovery of a new gold mine would drive gold prices down. The underlying idea behind the gold standard fx trader exchange rates jamaica that governments guaranteed the conversion of currency into a specific amount of gold, and vice versa. In other words, a currency would be backed by gold. Obviously, governments needed a fairly substantial gold reserve in order to meet the demand for currency exchanges. During the late nineteenth century, all of the major economic countries had defined an amount of currency to an ounce of gold.
Over time, the difference in price of an ounce of gold between two currencies became the exchange rate for those two currencies. This represented the first standardized means of currency exchange in history. Fx trader exchange rates jamaica gold standard eventually broke down during the beginning of World War I. Due to the political tension with Germany, the major European powers felt a need to complete large military projects. The financial burden of these projects was so substantial that there was not enough gold at the time to exchange for all fx trader exchange rates jamaica excess currency that the governments were printing off.
Although the gold standard would make a small comeback during the inter-war years, most countries had dropped it again by the onset of World War II.
However, gold never ceased being the ultimate form fx trader exchange rates jamaica monetary value. Bretton Woods System Before the end of World War II, the Allied nations believed that there would be a need to set up a monetary system in order to fill the void that was left behind when the gold standard system was abandoned.
In Julymore than representatives from the Allies convened at Bretton Woods, New Hampshire, to deliberate over what would be called the Bretton Woods system of international monetary management. One of the main features of Bretton Woods is that the U. This turned out to be the primary reason that Bretton Woods eventually failed.
Over the next 25 or so years, the U. By the early s, U. Finally, on August fx trader exchange rates jamaica,U. President Richard Nixon closed the gold window, and the U. This event marked the end of Bretton Woods.
Even though Bretton Woods didn't last, it left an important legacy that still has a significant effect on today's international economic climate. This legacy exists in the form of the three international agencies created in the s: Current Exchange Rates After the Bretton Woods system broke down, the world finally accepted the use of floating foreign exchange rates during the Jamaica agreement of This meant that the use of the gold standard would be permanently abolished.
However, this is not to say that governments adopted a pure free-floating exchange rate system. Most governments employ one of the following three exchange rate systems that are still used today:. Dollarization This event occurs when a country decides not to issue its own currency and adopts a foreign currency as its national currency. Although dollarization usually enables a country to be seen as a more stable place for investment, the drawback is that the country's central bank can no longer print money or make any sort of monetary policy.
An example of dollarization is El Salvador's use of the U. To read more, see Dollarization Explained. Pegged Rates Pegging occurs when one country directly fixes its exchange rate to a foreign currency so that the country will have somewhat more stability than a normal float. More specifically, pegging allows a country's currency to be exchanged at a fixed rate with a single or a specific basket of foreign currencies.
The currency will only fluctuate when the pegged currencies change. For example, China pegged its yuan to the U. The downside to pegging would be that a currency's value is at the mercy of the pegged currency's economic situation. For example, if the U. Managed Floating Rates This type of system is created when a currency's exchange rate is allowed to freely change in value subject to the market forces of supply and demand.
However, the government or central bank may intervene to stabilize extreme fluctuations in exchange rates. For example, if a country's currency is depreciating fx trader exchange rates jamaica beyond an fx trader exchange rates jamaica level, the government can raise short-term interest rates.
Raising rates should cause the currency to appreciate slightly; but understand that this is a very simplified example. Central banks typically employ a number of tools to manage currency. Market Participants Unlike the equity market - where investors often only trade with institutional investors such as mutual funds or other individual investors - there are additional participants that trade on the forex market for entirely different reasons than those on the fx trader exchange rates jamaica market.
Therefore, it is important to identify and understand the functions and motivations of the main players of fx trader exchange rates jamaica forex market. Governments and Central Banks Arguably, some of the most influential participants involved with currency exchange are the central banks and federal governments. In most countries, the central bank is an extension of the government and conducts its policy in tandem with the government.
However, some governments feel that a more independent central bank would be more effective in balancing the goals of curbing inflation and keeping interest rates low, which tends to increase economic growth. Regardless of the degree of independence that a central bank possesses, government representatives typically have regular consultations with central bank representatives to discuss monetary policy.
Thus, central banks and governments are usually on the same page when it comes to monetary policy. Central banks are often involved in manipulating reserve volumes in order to meet certain economic goals. For example, ever since pegging its currency the yuan to the U.
Central banks use the foreign exchange market to adjust their reserve volumes. With extremely deep pockets, they yield significant influence on the currency markets. Banks and Other Financial Institutions In addition to central banks and governments, some of the largest participants involved with forex transactions are banks. Most individuals who need foreign currency for small-scale transactions deal with neighborhood banks.
However, individual transactions pale in comparison to the volumes that are traded in the interbank market. The interbank market is the market through which large banks transact with each other and determine the currency price that individual traders see on their trading platforms.
These banks transact with each other on electronic brokering systems that are based upon credit. Only banks that have credit relationships with each other can engage in transactions. The larger the bank, fx trader exchange rates jamaica more credit relationships it has and the better the pricing it can access for its customers. The smaller the bank, the less credit relationships it has and the lower the priority it has on the pricing scale.
One way that banks make money on the forex market is by exchanging currency at a premium to the price they paid to obtain it. Since the forex market is a decentralized market, it is common to see different banks with slightly different exchange rates for the same currency. Hedgers Some of the biggest clients of these banks are businesses that deal with international transactions. Whether a business is selling to an international client or buying from an international supplier, it will need to deal with the volatility of fluctuating currencies.
If there is one thing that management and shareholders detest, it is uncertainty. Having to fx trader exchange rates jamaica with foreign-exchange risk is a big problem for many multinationals.
For example, suppose that a German company orders some equipment from a Japanese manufacturer to be paid in yen one year from now. Since the exchange rate can fluctuate wildly over an entire year, the German company has no way of knowing whether it will end up paying more euros at the time of delivery.
One choice that a business can make to reduce the uncertainty of foreign-exchange risk is to go into the spot market and make an immediate transaction for the foreign fx trader exchange rates jamaica that they need. Unfortunately, businesses may not have enough cash on hand to make fx trader exchange rates jamaica transactions or may not want to hold massive amounts of foreign currency for long periods of time.
Therefore, businesses quite frequently employ hedging strategies in order to lock in a specific exchange rate for the future or to remove all sources of exchange-rate risk for that transaction.
For example, if a European company wants to import steel from the U. If the price of the euro falls against the dollar before payment is made, the European company will realize a financial loss. As such, it could enter into a contract that locked in the current exchange rate to eliminate the risk of dealing in U. These contracts could be either forwards or futures contracts.
Speculators Another class of market participants fx trader exchange rates jamaica with foreign exchange-related transactions is speculators. Rather than hedging against movement in exchange rates or exchanging currency to fund international transactions, speculators attempt to make money by taking advantage of fluctuating exchange-rate levels.
The most famous of all currency speculators is probably George Soros. Some of the largest and most controversial speculators on the forex market are hedge funds, which are essentially unregulated funds that employ unconventional investment strategies in order to reap large returns. Think of them as mutual funds on steroids. Hedge funds are the favorite whipping boys of many a central banker. Given that they can place such massive bets, they can have a major effect on a country's currency and economy.
Some critics blamed hedge funds for the Asian currency fx trader exchange rates jamaica of the late s, but others have pointed out that the real problem was the ineptness of Asian central bankers.
Either way, speculators can have a big sway on the currency markets, particularly big ones. Now that you have a basic understanding of the forex market, its participants and its history, we can move on to some of the more advanced concepts that will bring fx trader exchange rates jamaica closer to being able to trade within this massive market.
The next section will look at the main economic theories that underlie the forex market. Introduction to Currency Trading Forex Tutorial: What is Forex Trading?