Question

describe the history of the forex, its participants and factors that influence exchange rates

Answer 1

History of Forex is as follows:

• Initially in 6000 BC Barter System was used ,
• Then in 6 Century BC Gold was used as a currency ,during this period Gold and silver was used for settling international payments,
• However , as Gold was heavy to be used as a currency , in 1800 Gold Standard was introduced and Government was liable to exchange any amount of paper money for Gold,
• From 1875 Gold Standard Monetary system was introduced,
• However, in the wake of World War I & II , this Standard could not be sustained as Government was required to print more notes,
• These events lead to introduction of Bretton Woods System,
• Followed by free Floating System in 1971 and Internet Trading in 1996,
• Presently 5.1 Trillion $ Foreign Exchange is traded on daily basis.

Participants in Forex Market are :

• Central banks
• Commercial Banks
• Foreign Exchange Brokers
• Multinational Companies
• Individuals and Small Businesses

Various Factors affecting Exchange Rates are as follows :

• Inflation Rate

Lower inflation Rate appreciates the currency and vice-versa

• Interest Rate

Increase in Interest rates appreciates the currency as it offers higher return to investors/lenders, leading to inflow of foreign capital.

• Country’s Current and Balance of Payments
• Terms of Trade
• Government Debt
• Speculation
• Recession
• Political Performance and Stability

Positive impact on these fronts appreciates the Currency and Negative impact depreciates the currency.