One Earth But 182 official currencies. Understand the world of Foreign Exchange

As any globe trotter or avid-traveler can certify one of the biggest pain-points of traveling across the world is the problem associated with changing currencies. Today there are 182 official currencies in the world each with their own names, currency design and patterns. Complicating matters further is the varying exchange rates, conversion charges, taxes etc that have to be taken into account when changing currencies. The vast diversity of our world even when limited to only one asset primarily used as a medium of exchange is astonishing. As with any other man-made invention once it starts getting too complicated it begins to develop an ecosystem around it attracting other players and participants. The same has been the case with currency which has now evolved into a fledgling marketplace better known as the foreign exchange market.

The foreign exchange market is the largest and most liquid in the world, and has grown to turn over more than USD 3 trillion per day. It was born of necessity, and its beginnings can be traced back to ancient times, when gold and silver-smiths had to facilitate barter between industries and lands. There are records of so-called money-changers from well over a millennium ago. It wasn’t until the medieval period and early modern times however that the foreign exchange market began to become what it is today. As powers became more firmly established, and economies tied more to money rather than the exchange of goods, there became a need to convert one currency into another. The main European powers began to maintain a foreign exchange (or forex) market in the late 17th and early 18th centuries, especially between England and Holland. The process was fractured however, as there was a constant power struggle and resulting wars between European nations such as England, France, Spain and Holland.

The real origins of the modern day global foreign exchange market started during the mid–to-late 19th century. This is primarily because the USA also began maintaining a forex market, and countries adopted the gold standard. This meant that currency was pegged to the value of gold, which made currency exchange more accurate and fluid compared to previous methods. By the early 20th century, there was a significant foreign exchange market in New York, Paris and Berlin. By the time the second world war started the forex market became integral to the functioning of the world’s major economies, and this lasts till today. WWII did have a major effect on these economies however, and it changed the balance of power all over the world. In short, the US Dollar became the most important currency; it stopped being tied to the value of gold, and is now the most used reserve currency in the world.

The eight most traded currencies in the foreign exchange market with the USA taking the lion's share

In 2012 though things are quite different from how they began. The internet in particular has drastically changed the type of people that trade on the forex market. Not that long ago, the only parties that could involve themselves were countries, banks and large corporations. Now, just about anyone can trade currency through an online platform. Interestingly, in the earliest records available, it was the common person and specific industries that were more interested in swapping their currency. The first online forex trade was in fact made in 1994. Foreign exchange trading is still in a constant state of change as new technologies update the platforms that people trade on. Initially, trading could only be done from specialist trading floors, then using specialist software, then on internet browsers, and in the past year, traders can now access the market on the go with a smartphone app. It’s becoming more and more well-known with the advent of social networking, and people who never would have considered investment are now turning to forex as a means of income.

Today there are a number of specialist sites that cater to every kind of individual interested to get into the business of foreign exchange. Babypips is the go-to primer for beginning forex traders. They have a host of columns covering all things from psychology, automation, and first time trading in a perspective that is accessible to new traders. Forex Factory along with DailyFX are great sources for up-to-the-minute market news and technical and fundamental analysis. Finally, XE.com is the go to destination for daily foreign exchange rates and currency conversion. As an area which is bound to involve a lot of discussion and learning from peers there also exists a social networking solution in this field. Traders Laboratory is a foreign exchange forum where you can find traders from around the world discussing all topics related to the financial markets. Couple this with some of the most popular forex mobile apps such as Bloomberg, Trade Interceptor and iTradeMobile and there is frankly no area in this financial vertical that hasn’t been explored.

Another major reason for the considerable spread of FX currency trading is that brokers now allow their account holders to trade on a margin. Previously, a trader would have to front all of the money they were dealing with, but now of course, only a small deposit is required.

One major development in the future that could virtually end the foreign exchange market as we know it, would be the advent of a single global currency. While that would be a dream come true for anyone who loves to travel it would be a nightmare for politicians and particularly global powers like the USA. Serial entrepreneur and recognized historian on monetary history and economics Mike Maloney has an interesting view on this rather remote possibility.

The history of the forex market is of course far longer and more complex than detailed here, but from looking at the key events, we can see that foreign exchange came about because it was essential for trade, and has now developed into one of the world’s most important markets. It is perhaps still changing, and there may yet be developments as technology progresses the global economies change.

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