Foreign Exchange Markets Summary Essay

1331 words - 5 pages

Money, Currency, Exchange, and Trade PAGE 1
Money, Currency, Exchange, and Trade:Gold Standard to Floating RatesAbstractMoney may make the world go around, but foreign exchange markets allow money to go around the world. International travel, studies, and business could not take place unless people had a way to assure they could securely enter into agreements to buy or sell whatever they wanted. A nation's currency must be able to be traded and accepted by international banks, businesses, and people in order for the world's nations to take part in international commerce. Foreign exchange markets and their players are the ones who assure international trade can occur.Money, Currency, Exchange, and Trade: Gold Standard to Floating RatesWe have all heard that money makes the world go around. As Americans, however, our nation has been relatively protected from role of money as a commodity. Americans enjoyed a world where the U.S. Dollar was the main currency of exchange and stability throughout the last half of the Twentieth Century. Unlike Europe, where citizens frequently travelled to a next-door nation whose currency was entirely different than their own and where their own currency would not be accepted, American's travelling to Canada or Mexico could be fairly sure merchants would accept their Dollars. As the first decade of the Twenty-first Century now draws to a close, however, a shock may be in store for Americans. The U.S. Dollar may no longer be the main currency of exchange in the world and may no longer be such a desired currency to hold.How and why a currency increases or decreases in value, the effects of such changes, and the resulting effects on a nation and the world are very important matters to consider. Money, although often thought of as only a medium of exchange, has a value of it own and, as such, is also a commodity, in the same way oil, gold, silver, or corn are commodities (Feiler, Schilling). The price of money as a commodity is often determined or set as a result of government action and international trade (supply and demand) which is observed and then used to determine a value. Such value determination is done by the foreign exchange markets of the world. It is because of such markets that international trade and business can function smoothly or at all (Feiler, Schilling). Foreign exchange trades can occur in a stock market like exchange, similar to the Chicago Board of Trade. Normally, however, it is the major banks in each major nation, such as the Bank of London, the Federal Reserve Bank of New York, and the Bank of Tokyo, which help exchange one currency for another and also, through their purchases of currency "reserves" help set the "price" of all currencies.This system where the prices of currencies are allowed to fluctuate is a "floating exchange rate" system (FRB New York). This floating system, although it may seem to make sense given how common international trade has become in the modern world, was not the...

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