Tuesday, September 24, 2013

Most of the developing countries measure their economy by the GDP and an internationally accepted currency is the United States Dollar. US Dollars are not necessarily the currency of normal use in a lot of the countries. All countries of the world need oil and coal for producing energy and thus to ensure faster development. The development is achieved through industrialization, industries run primarily on electricity. The electricity is produced in power stations which use either coal or gas or petroleum for driving the turbines which produce electricity. To purchase oil from the countries that produce oil, United States Dollar is the currency used. Thus all countries of the world need to have certain reserves of foreign exchange namely US Dollars, to ensure sustenance. Thus the countries carry out its international businesses in US Dollars. Thus every export order that is completed earns revenue for the country in US Dollars. The wealth of a country is also determined by the amount of the foreign exchange reserves that it has.

The exchange rate of US Dollar is determined by the gold reserves and the forex reserves the country has. The forex trading is categorized in different levels such as inter-bank market, this includes the dealers in securities and the commercial banks. Here the trading happens with the bid and ask prices of the currencies being traded. This also determines the exchange rate of the currency against other currencies. The inter-bank Forex Trading transactions account for almost 53% of the total transactions. The next level of players are those such as Pension Funds, Mutual Funds, etc. Central Banks of the countries also get involved in the Forex Trading. They do this inorder to control the money supply into the country also thus influencing the inflation and the bank interest rates. These national central banks also use the forex money to help stabilize the internal and international markets.

Most of the foreign exchange trading is speculative in nature. The speculative nature of this trading is kindled by the hedge funds operations that various multi-national organizations undertake. There are individuals who also get involved in this trading and they are called retail brokers. The Foreign exchange was greatly affected due to the introduction in the automated dealing systems, matching systems and the Internet trading. The dealing systems were mainly based on on-line computer systems in which the banks are linked to one-to-one basis. The matching systems are based on electronic brokers. These are very fast and very reliable too.


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