Forex is the largest financial market in the world. In this article, you will find the most important information about the forex market, real-time exchange rates (live quotes of currency pairs) and current market news.
Forex – what is it?
Forex is just one of several names for the international foreign exchange market (also known as Foreign Exchange Market or FX Market). Simply put, FOREX is a market where you exchange one currency for another at a fixed price. It is the largest and most liquid market in the world, with a daily turnover of more than $6.6 trillion. The main traders on the Forex market are banks and other large financial institutions, but in principle each of us can be an indirect participant in trading, e.g. when we make a transaction to buy the currency of the country we are going on vacation to. Originally, the main function of the Forex market was to improve the process of currency exchange for the purposes of international trade in raw materials, goods or services, but its very high volatility and liquidity have made it an extremely attractive place for traders from all over the world to invest and speculate. Therefore, currently about 90% of Forex transactions are speculative transactions.
The Forex market is not centralized, which means that there is no physical headquarters or location, such as the Warsaw Stock Exchange or the New York Stock Exchange. This is the so-called over-the-counter (interbank) market, and forex trading takes place through computer networks connecting its participants.
Currently, almost everyone can have the opportunity to speculate on the Forex market in a way very similar to how professional traders of financial institutions speculate, for example through regulated brokerage companies, and with technological progress, services of this type are developing extremely dynamically. We already know what this market looks like now, now let’s take a look at its history.
How was Forex created? History of the Forex market
The currency exchange market, or the Forex market as we know it today, was formed only in the twentieth century. In the past, it was not currencies, but gold, silver and other metals that for centuries played the role of an international means of payment accepted throughout the civilized world. Clear changes occurred in the 19th century, when European countries fixed the value of their currencies in relation to gold, at the same time committing themselves to their eventual redemption (gold currency system). As a result, it made it possible to freely exchange currencies for gold (and vice versa), contributing to the improvement and development of international trade. Currently, the volatility of currency quotations seems obvious to us, but during the period of the gold standard, the exchange rate of currencies for gold remained constant and in line with the parity set by central banks.
It was not until the outbreak of the First World War that countries abandoned the previous gold standard system, and the resulting “currency mess” hindering international trade persisted until the end of the Second World War.
In order to solve the post-war monetary problems and stabilize the world’s major currencies, the so-called Bretton Woods Conference was convened in 1944, where the foundations of the current Forex market were laid under an agreement:
- the agreement created the International Monetary Fund and the World Bank
- Gold has become a comparative measure
- The US dollar became the so-called central currency and only it was convertible into gold
- Exchange rates were fixed, but in exceptional cases prices could change.
The Bretton Woods system, like its predecessor (the gold standard system), had some drawbacks. As a result, without going into details, it led to an overvaluation of the dollar, which in the late 1960s began to lose investor confidence, and as a result, more and more countries wanted to exchange their dollars for gold. In 1971, the Bretton Woods agreement finally collapsed – the US abolished the convertibility of dollars into gold and the modern forex currency market was born, where currency quotations depend primarily on the strength of supply and demand.
Currency pairs in Forex
On the Forex market, each currency is assigned a unique three-letter code, e.g. EUR (euro), USD (dollar) or CHF (Swiss franc). Currency pairs are traded on the Forex market, and their value is always presented as the ratio of the value of one currency to another, e.g. EUR/USD (euro to dollar), GBP/USD (pound sterling to dollar) or USD/JPY (dollar to Japanese yen).
The most popular and most liquid FX pairs include:
- EUR/USD – Euro vs US Dollar
- GBP/USD – Pound Sterling against the US Dollar
- USD/CAD – Canadian Dollar to US Dollar
- USD/JPY – US Dollar to Japanese Yen
- USD/CHF – US Dollar to Swiss Franc
Currency pairs on the Forex market can be conventionally divided into several groups:
Majors – major currency pairs consisting of the currencies of the world’s largest economies, such as EUR/USD, GBP/USD, or USD/CHF.
Minors – minor currency pairs of lesser global importance than the “majors”, such as USD/CAD, AUD/USD or NZDUSD.
Exotic – exotic currency pairs, usually one of the currencies in the pair is the currency of a country belonging to “emerging markets”, i.e. developing countries (hence the name “Emergings“). Examples of such pairs are USD/RON or USD/PLN.
If we talk about the forex market and currency pairs, it is necessary to mention the concepts of the base currency and the quote currency – these names correspond to the first and second currencies in the pair, respectively.
The price of a currency pair (quote) means how much of the quote currency (the second in the pair) can be purchased for one unit of the base currency (the first in the pair).
Let’s check how to interpret the price of currency pairs based on two simple examples:
If the price of the EUR/USD is 1.1100 – it means that for every one euro (1 EUR) we will buy exactly one dollar and 11 cents (1.11 USD).
If the price of USD/JPY is 108.00 – it means that for one US dollar we will get exactly 108 Japanese yen.
It is also worth mentioning the concept of commodity currencies, which often appears, not only in the context of the Forex market. Commodity currencies are the currencies of countries whose economies are largely based on the export of raw materials. The main commodity currencies are: Australian dollar (AUD), New Zealand dollar (NZD), Canadian dollar (CAD) and Norwegian krone (NOK). A concept that is also worth knowing is the term of a currency pair as a cross pair. A cross pair is a currency pair that does not include the dollar, such as EUR/JPY, EUR/PLN or EUR/GBP.