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  • With daily volume topping a trillion dollars, the international foreign exchange (Forex) system is the largest market in the world. It connects a diverse group of central banks, financial institutions, and investors, all of whom trade Forex for different reasons.

    History

    The contemporary Forex market has its roots in the 1944 Bretton Woods Agreement, which created a new system of global currency exchange among the soon-to-be-victorious Allied powers.

    Actors

    The primary actors in the Forex market are central banks, like the U.S. Federal Reserve and European Central Bank, large financial institutions, global corporations, hedge funds, and individual investors.

    Purpose

    The main purpose of the foreign exchange market is to enable rapid, simple, and transparent buying and selling of currencies between thousands of participants around the globe. Central banks use the foreign exchange system to try to offer debt and manipulate currency values, while large financial institutions use the Forex to provide brokerage, clearing, and hedging services to an assortment of clients. Multinational corporations use Forex in efforts to reduce their business risks in foreign countries. And investors use Forex to try to achieve capital gains by buying currencies expected to go up, and selling currencies expected to go down.

    Factors Influencing Forex Price Movement

    The economic condition of a particular country tends to play the strongest role in how its currency is valued in the Forex market. Economically strong countries tend to have a strong currency, while those impaired by inflation, depression, or political turmoil tend to have weak currencies. Other crucial factors are money supply, trade deficits and surpluses, and interest rate trends.

    Forex Investment Products

    There are a variety of different investment products in use in the foreign exchange market. The most common and widely recognized Forex instrument is the spot contract, which provides for standard bank note exchange. Other widely-used products are futures contracts, options contracts, and foreign exchange indexes and exchange-traded funds.

    Source:

    CMS Forex: Forex Overview

    The Daily Reckoning: Bretton Woods Agreement

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