Nonfarm payrolls

onfarm payroll employment is an influential statistic and economic indicator released monthly by the United States Department of Labor as part of a comprehensive report on the state of the labor market.
It is a compiled name for goods-producing, construction and manufacturing companies. The Bureau of Labor Statistics releases preliminary data on the first Friday of the following month (for example, data for April would be reported the first Friday in May), at 8:30 a.m. Eastern Time. Nonfarm payroll is included in the monthly Employment Situation or informally the jobs report and affects the US dollar, the Foreign exchange market, the bond market, and the stock market.

The figure released is the change in nonfarm payrolls (NFP), compared to the previous month, and is usually between +10,000 and +250,000 during non-recessional times. The NFP number is meant to represent the number of jobs added or lost in the economy over the last month, not including jobs relating to the farming industry

Special Drawing Rights

pecial Drawing Rights (SDRs) are international foreign exchange reserve assets.[1] Allocated to nations by the International Monetary Fund (IMF), a SDR represents a claim to foreign currencies for which it may be exchanged in times of need.[1]
Today, the US Dollar is the world's primary foreign exchange reserve asset,[2][3][4] and SDRs may be little used.[5] Some nations, notably China and Russia (as well as the UN[2]), favour increasing the substance and function of the SDR.[6][7]
Although denominated in US dollars, the nominal value of an SDR is derived from a basket of currencies, specifically, a fixed amount of Japanese Yen, US Dollars, British Pounds and Euros.[1]

SDRs are the International Monetary Fund's unit of account[1] and are denoted with the ISO 4217 currency code XDR.

Difficulties

Limited additional benefit with extra cost
Some economists argued that a single world currency was unnecessary, because the U.S. dollar was providing many of the benefits of a world currency while avoiding some of the costs.[15] If the world does not form an optimum currency area, then it would be economically inefficient for the world to share one currency.
[edit]
Economically incompatible nations
In the present world, nations are not able to work together closely enough to be able to produce and support a common currency. There has to be a high level of trust between different countries before a true world currency could be created. A world currency might even undermine national sovereignty of smaller states.
[edit]
Wealth redistribution

The interest rate set by the central bank indirectly determines the interest rate customers must pay on their bank loans. This interest rate affects the rate of interest among individuals, investments, and countries. Lending to the poor involves more risk than lending to the rich. As a result of the larger differences in wealth in different areas of the world, a central bank's ability to set interest rate to make the area prosper will be increasingly compromised, since it places wealthiest regions in conflict with the poorest regions in debt.

Single world currency

An alternative definition of a world or global currency refers to a hypothetical single global currency or supercurrency, as the proposed terra or the DEY (acronym for Dollar Euro Yen),[12] produced and supported by a central bank which is used for all transactions around the world, regardless of the nationality of the entities (individuals, corporations, governments, or other organisations) involved in the transaction. No such official currency currently exists.
There are many different variations of the idea, including a possibility that it would be administered by a global central bank or that it would be on the gold standard.[13] Supporters often point to the euro as an example of a supranational currency successfully implemented by a union of nations with disparate languages, cultures, and economies. Alternatively, digital gold currency can be viewed as an example of how global currency can be implemented without achieving national government consensus.
A limited alternative would be a world reserve currency issued by the International Monetary Fund, as an evolution of the existing Special Drawing Rights and used as reserve assets by all national and regional central banks. On March 26, 2009, a UN panel of expert economists called for a new global currency reserve scheme to replace the current US dollar-based system. The panel's report pointed out that the "greatly expanded SDR (Special Drawing Rights), with regular or cyclically adjusted emissions calibrated to the size of reserve accumulations, could contribute to global stability, economic strength and global equity." [1]

In addition to the idea of a single world currency, some evidence suggests the world may evolve multiple global currencies that exchange on a singular market system. The rise of digital global currencies such as Ven[14] suggest that multiple global currencies may offer wider formats for trade as they gain strength and wider acceptance.

Views in favor of a supranational currency

Advocates, notably Keynes,[11] of a global currency often argue[11] that such a currency would not suffer from inflation, which, in extreme cases, has had disastrous effects for economies. In addition, many[11] argue that a global currency would make conducting international business more efficient and would encourage Foreign direct investment (FDI).

An often over-looked alternative to an establishment-created global reserve currency is for anyone to adopt already existing mechanisms that traditionally has worked very well in conducting international business. There are, for example, no obstacles for legal or physical persons to start drawing contracts and invoicing in XAU - Gold - as opposed to the USD, the EUR or the YEN

Recently proposed (21st century)

On March 16, 2009, in connection with the April 2009 G20 summit, the Kremlin called for a supranational reserve currency as part of a reform of the global financial system. In a document containing proposals for the G20 meeting, it suggested that the "IMF (or an Ad Hoc Working Group of G20) should be instructed to carry out specific studies to review the following options:
Enlargement (diversification) of the list of currencies used as reserve ones, based on agreed measures to promote the development of major regional financial centers. In this context, we should consider possible establishment of specific regional mechanisms which would contribute to reducing volatility of exchange rates of such reserve currencies.
Introduction of a supra-national reserve currency to be issued by international financial institutions. It seems appropriate to consider the role of IMF in this process and to review the feasibility of and the need for measures to ensure the recognition of SDRs as a "supra-reserve" currency by the whole world community."[4][5]
On March 24, 2009, Zhou Xiaochuan, President of the People's Bank of China, called for "creative reform of the existing international monetary system towards an international reserve currency," believing it would "significantly reduce the risks of a future crisis and enhance crisis management capability."[6] Zhou suggested that the IMF's Special Drawing Rights (a currency basket comprising dollars, euros, yen, and sterling) could serve as a super-sovereign reserve currency, not easily influenced by the policies of individual countries. US President Obama, however, rejected the suggestion stating that "the dollar is extraordinarily strong right now." [7] At the G8 summit in July 2009, the Russian president expressed Russia's desire for a new supranational reserve currency by showing off a coin minted with the words "unity in diversity". The coin, an example of a future world currency, emphasized his call for creating a mix of regional currencies as a way to address the global financial crisis.[8]

On March 30, 2009, at the Second South America-Arab League Summit in Qatar, Venezuelan President Hugo Chavez proposed the creation of the Petro as a supranational currency, in order to face the instability that the generation of fiat currency has caused in the world economy.[9] The petrocurrency would be backed by the huge oil reserves of the oil producing countries

Gold Standard (19th - 20th centuries)

Prior to and during most of the 19th century, international trade was denominated in terms of currencies that represented weights of gold. Most national currencies at the time were in essence merely different ways of measuring gold weights (much as the yard and the meter both measure length and are related by a constant conversion factor). Hence some assert that gold was the world's first global currency. The emerging collapse of the international gold standard around the time of World War I had significant implications for global trade.

Historical and current

In the 17th and 18th century, the use of silver Spanish dollars or "pieces of eight" spread from the Spanish territories in the Americas westwards to Asia and eastwards to Europe forming the first ever worldwide currency. Spain's political supremacy on the world stage, the importance of Spanish commercial routes across the Atlantic and the Pacific, and the coin's quality and purity of silver helped it become internationally accepted for over two centuries. It was legal tender in Spain's Pacific territories of the Philippines, Micronesia, Guam and the Caroline Islands and later in China and other Southeast Asian countries until the mid-19th century. In the Americas it was legal tender in all of South and Central America (except Brazil) as well as in the U.S. and Canada until the mid-19th century. In Europe the Spanish dollar was legal tender in the Iberian Peninsula, in most of Italy including: Milan, the Kingdom of Naples, Sicily and Sardinia, as well as in the Franche-Comté (France), and in the Spanish Netherlands. It was also used in other European states including the Austrian Habsburg territories.

There are other coins/currencies that have been used over the centuries. The Austrian Maria Theresa thaler is still used in some back areas of the Middle East and Africa and was first issued in 1741. There was also the Roman Denarius, which for hundreds of years was the world's premier currency.[citation needed]

Euro

Since 1999, the dollar's dominance has begun to be eroded by the euro, which represents a larger size economy, and has the prospect of more countries adopting the euro as their national currency. The euro inherited the status of a major reserve currency from the German Mark (DM), and since then its contribution to official reserves has risen as banks seek to diversify their reserves and trade in the eurozone continues to expand.[2]
As with the dollar, quite a few of the world's currencies are pegged against the euro. They are usually Eastern European currencies like the Bulgarian lev, plus several west African currencies like the Cape Verdean escudo and the CFA franc. Other European countries, while not being EU members, have adopted the euro due to currency unions with member states, or by unilaterally superseding their own currencies: Andorra, Monaco, Montenegro, San Marino, and Vatican City.

As of December 2006, the euro surpassed the dollar in the combined value of cash in circulation. The value of euro notes in circulation has risen to more than €610 billion, equivalent to US$800 billion at the exchange rates at the time (today equivalent to circa US$968 billion).

Dominant global reserve currencies

U.S. dollar

Worldwide use of the euro and the U.S. dollar
  United States
  External adopters of the US dollar
  Currencies pegged to the US dollar
  Currencies pegged to the US dollar w/ narrow band
  Eurozone
  External adopters of the euro
  Currencies pegged to the euro
  Currencies pegged to the euro w/ narrow band
Note that the Belarusian ruble is pegged to the Euro, Russian Ruble and U.S. Dollar in a currency basket.
In the period following the Bretton Woods Conference of 1944, exchange rates around the world were pegged against the United States dollar, which could be exchanged for a fixed amount of gold. This reinforced the dominance of the US dollar as a global currency.
Since the collapse of the fixed exchange rate regime and the gold standard and the institution of floating exchange rates following the Smithsonian Agreement in 1971, most currencies around the world have no longer been pegged against the United States dollar. However, as the United States remained the world's preeminent economic superpower, most international transactions continued to be conducted with the United States dollar, and it has remained the de facto world currency.
Only two serious challengers to the status of the United States dollar as a world currency have arisen. During the 1980s, the Japanese yen became increasingly used as an international currency,[citation needed] but that usage diminished with the Japanese recession in the 1990s. More recently, the euro has increasingly competed with the United States dollar in international finance.
Since the mid-20th century, the de facto world currency has been the United States dollar. According to Robert Gilpin in Global Political Economy: Understanding the International Economic Order (2001): "Somewhere between 40 and 60 percent of international financial transactions are denominated in dollars. For decades the dollar has also been the world's principal reserve currency; in 1996, the dollar accounted for approximately two-thirds of the world's foreign exchange reserves" (255).

Many of the world's currencies are pegged against the dollar. Some countries, such as Ecuador, El Salvador, and Panama, have gone even further and eliminated their own currency (see dollarization) in favor of the United States dollar. The dollar continues to dominate global currency reserves, with 63.9% held in dollars, as compared to 26.5% held in euros (see Reserve Currency).

World currency

In the foreign exchange market and international finance, a world currency, supranational currency, or global currency refers to a currency in which the vast majority of international transactions take place and which serves as the world's primary reserve currency. In March 2009, as a result of the global economic crisis, China and Russia have pressed for urgent consideration of a global currency. A UN panel of expert economists has proposed replacing the current US dollar-based system by greatly expanding the IMF's SDRs or Special Drawing Rights.[1]

Currencies have many forms depending on several properties: type of issuance, type of issuer and type of backing. The particular configuration of those properties leads to different types of money. The pros and cons of a currency are strongly influenced by the type proposed. Consider, for example, the properties of a complementary currency.

Active codes

The following is a list of active codes of official ISO 4217 currency names.

Code Num E[1] Currency Locations using this currency
AED 784 2 United Arab Emirates dirham United Arab Emirates
AFN 971 2 Afghan afghani Afghanistan
ALL 008 2 Albanian lek Albania
AMD 051 2 Armenian dram Armenia
ANG 532 2 Netherlands Antillean guilder Curaçao, Sint Maarten
AOA 973 2 Angolan kwanza Angola
ARS 032 2 Argentine peso Argentina
AUD 036 2 Australian dollar Australia, Australian Antarctic Territory, Christmas Island, Cocos (Keeling) Islands, Heard and McDonald Islands, Kiribati, Nauru, Norfolk Island, Tuvalu
AWG 533 2 Aruban florin Aruba
AZN 944 2 Azerbaijani manat Azerbaijan
BAM 977 2 Bosnia and Herzegovina convertible mark Bosnia and Herzegovina
BBD 052 2 Barbados dollar Barbados
BDT 050 2 Bangladeshi taka Bangladesh
BGN 975 2 Bulgarian lev Bulgaria
BHD 048 3 Bahraini dinar Bahrain
BIF 108 0 Burundian franc Burundi
BMD 060 2 Bermudian dollar (customarily known as Bermuda dollar) Bermuda
BND 096 2 Brunei dollar Brunei, Singapore
BOB 068 2 Boliviano Bolivia
BOV 984 2 Bolivian Mvdol (funds code) Bolivia
BRL 986 2 Brazilian real Brazil
BSD 044 2 Bahamian dollar Bahamas
BTN 064 2 Bhutanese ngultrum Bhutan
BWP 072 2 Botswana pula Botswana
BYR 974 0 Belarusian ruble Belarus
BZD 084 2 Belize dollar Belize
CAD 124 2 Canadian dollar Canada
CDF 976 2 Congolese franc Democratic Republic of Congo
CHE 947 2 WIR Bank (complementary currency) Switzerland
CHF 756 2 Swiss franc Switzerland, Liechtenstein
CHW 948 2 WIR Bank (complementary currency) Switzerland
CLF 990 0 Unidad de Fomento (funds code) Chile
CLP 152 0 Chilean peso Chile
CNY 156 2 Chinese yuan China (Mainland)
COP 170 2 Colombian peso Colombia
COU 970 2 Unidad de Valor Real Colombia
CRC 188 2 Costa Rican colon Costa Rica
CUC 931 2 Cuban convertible peso Cuba
CUP 192 2 Cuban peso Cuba
CVE 132 0 Cape Verde escudo Cape Verde
CZK 203 2 Czech koruna Czech Republic
DJF 262 0 Djiboutian franc Djibouti
DKK 208 2 Danish krone Denmark, Faroe Islands, Greenland
DOP 214 2 Dominican peso Dominican Republic
DZD 012 2 Algerian dinar Algeria
EGP 818 2 Egyptian pound Egypt
ERN 232 2 Eritrean nakfa Eritrea
ETB 230 2 Ethiopian birr Ethiopia
EUR 978 2 Euro 17 European Union countries, Andorra, Kosovo, Monaco, Montenegro, San Marino, Vatican City; see eurozone
FJD 242 2 Fiji dollar Fiji
FKP 238 2 Falkland Islands pound Falkland Islands
GBP 826 2 Pound sterling United Kingdom, Crown Dependencies (the Isle of Man and the Channel Islands), certain British Overseas Territories (South Georgia and the South Sandwich Islands, British Antarctic Territory and British Indian Ocean Territory)
GEL 981 2 Georgian lari Georgia
GHS 936 2 Ghanaian cedi Ghana
GIP 292 2 Gibraltar pound Gibraltar
GMD 270 2 Gambian dalasi Gambia
GNF 324 0 Guinean franc Guinea
GTQ 320 2 Guatemalan quetzal Guatemala
GYD 328 2 Guyanese dollar Guyana
HKD 344 2 Hong Kong dollar Hong Kong Special Administrative Region, Macau Special Administrative Region
HNL 340 2 Honduran lempira Honduras
HRK 191 2 Croatian kuna Croatia
HTG 332 2 Haitian gourde Haiti
HUF 348 2 Hungarian forint Hungary
IDR 360 0 Indonesian rupiah Indonesia
ILS 376 2 Israeli new sheqel Israel
INR 356 2 Indian rupee Bhutan, India
IQD 368 0 Iraqi dinar Iraq
IRR 364 0 Iranian rial Iran
ISK 352 0 Icelandic króna Iceland
JMD 388 2 Jamaican dollar Jamaica
JOD 400 3 Jordanian dinar Jordan
JPY 392 0 Japanese yen Japan
KES 404 2 Kenyan shilling Kenya
KGS 417 2 Kyrgyzstani som Kyrgyzstan
KHR 116 2 Cambodian riel Cambodia
KMF 174 0 Comoro franc Comoros
KPW 408 0 North Korean won North Korea
KRW 410 0 South Korean won South Korea
KWD 414 3 Kuwaiti dinar Kuwait
KYD 136 2 Cayman Islands dollar Cayman Islands
KZT 398 2 Kazakhstani tenge Kazakhstan
LAK 418 0 Lao kip Laos
LBP 422 0 Lebanese pound Lebanon
LKR 144 2 Sri Lanka rupee Sri Lanka
LRD 430 2 Liberian dollar Liberia
LSL 426 2 Lesotho loti Lesotho
LTL 440 2 Lithuanian litas Lithuania
LVL 428 2 Latvian lats Latvia
LYD 434 3 Libyan dinar Libya
MAD 504 2 Moroccan dirham Morocco, Western Sahara
MDL 498 2 Moldovan leu Moldova (except Transnistria)
MGA 969 0.69897...[2] Malagasy ariary Madagascar
MKD 807 2 Macedonian denar Republic of Macedonia
MMK 104 0 Myanma kyat Myanmar
MNT 496 2 Mongolian tugrik Mongolia
MOP 446 1 Macanese pataca Macau Special Administrative Region
MRO 478 0.69897...[2] Mauritanian ouguiya Mauritania
MUR 480 2 Mauritian rupee Mauritius
MVR 462 2 Maldivian rufiyaa Maldives
MWK 454 2 Malawian kwacha Malawi
MXN 484 2 Mexican peso Mexico
MXV 979 2 Mexican Unidad de Inversion (UDI) (funds code) Mexico
MYR 458 2 Malaysian ringgit Malaysia
MZN 943 2 Mozambican metical Mozambique
NAD 516 2 Namibian dollar Namibia
NGN 566 2 Nigerian naira Nigeria
NIO 558 2 Cordoba oro Nicaragua
NOK 578 2 Norwegian krone Norway, Svalbard, Jan Mayen, Bouvet Island, Queen Maud Land, Peter I Island
NPR 524 2 Nepalese rupee Nepal
NZD 554 2 New Zealand dollar Cook Islands, New Zealand, Niue, Pitcairn, Tokelau
OMR 512 3 Omani rial Oman
PAB 590 2 Panamanian balboa Panama
PEN 604 2 Peruvian nuevo sol Peru
PGK 598 2 Papua New Guinean kina Papua New Guinea
PHP 608 2 Philippine peso Philippines
PKR 586 2 Pakistani rupee Pakistan
PLN 985 2 Polish złoty Poland
PYG 600 0 Paraguayan guaraní Paraguay
QAR 634 2 Qatari rial Qatar
RON 946 2 Romanian new leu Romania
RSD 941 2 Serbian dinar Serbia
RUB 643 2 Russian rouble Russia, Abkhazia, South Ossetia
RWF 646 0 Rwandan franc Rwanda
SAR 682 2 Saudi riyal Saudi Arabia
SBD 090 2 Solomon Islands dollar Solomon Islands
SCR 690 2 Seychelles rupee Seychelles
SDG 938 2 Sudanese pound Sudan
SEK 752 2 Swedish krona/kronor Sweden
SGD 702 2 Singapore dollar Singapore, Brunei
SHP 654 2 Saint Helena pound Saint Helena
SLL 694 0 Sierra Leonean leone Sierra Leone
SOS 706 2 Somali shilling Somalia (except Somaliland)
SRD 968 2 Surinamese dollar Suriname
STD 678 0 São Tomé and Príncipe dobra São Tomé and Príncipe
SYP 760 2 Syrian pound Syria
SZL 748 2 Lilangeni Swaziland
THB 764 2 Thai baht Thailand
TJS 972 2 Tajikistani somoni Tajikistan
TMT 934 2 Turkmenistani manat Turkmenistan
TND 788 3 Tunisian dinar Tunisia
TOP 776 2 Tongan paʻanga Tonga
TRY 949 2 Turkish lira Turkey, Northern Cyprus
TTD 780 2 Trinidad and Tobago dollar Trinidad and Tobago
TWD 901 2 New Taiwan dollar Taiwan and other islands that are under the effective control of the Republic of China (ROC)
TZS 834 2 Tanzanian shilling Tanzania
UAH 980 2 Ukrainian hryvnia Ukraine
UGX 800 0 Ugandan shilling Uganda
USD 840 2 United States dollar American Samoa, British Indian Ocean Territory, Caribbean Netherlands, Ecuador, El Salvador, Guam, Haiti, Marshall Islands, Micronesia, Northern Mariana Islands, Palau, Panama, Puerto Rico, Timor-Leste, Turks and Caicos Islands, United States, Virgin Islands, Bermuda (as well as Bermudian Dollar)
USN 997 2 United States dollar (next day) (funds code) United States
USS 998 2 United States dollar (same day) (funds code) (one source[who?] claims it is no longer used, but it is still on the ISO 4217-MA list) United States
UYU 858 2 Uruguayan peso Uruguay
UZS 860 2 Uzbekistan som Uzbekistan
VEF 937 2 Venezuelan bolívar fuerte Venezuela
VND 704 0 Vietnamese đồng Vietnam
VUV 548 0 Vanuatu vatu Vanuatu
WST 882 2 Samoan tala Samoa
XAF 950 0 CFA franc BEAC Cameroon, Central African Republic, Republic of the Congo, Chad, Equatorial Guinea, Gabon
XAG 961 . Silver (one troy ounce)
XAU 959 . Gold (one troy ounce)
XBA 955 . European Composite Unit (EURCO) (bond market unit)
XBB 956 . European Monetary Unit (E.M.U.-6) (bond market unit)
XBC 957 . European Unit of Account 9 (E.U.A.-9) (bond market unit)
XBD 958 . European Unit of Account 17 (E.U.A.-17) (bond market unit)
XCD 951 2 East Caribbean dollar Anguilla, Antigua and Barbuda, Dominica, Grenada, Montserrat, Saint Kitts and Nevis, Saint Lucia, Saint Vincent and the Grenadines
XDR 960 . Special Drawing Rights International Monetary Fund
XFU Nil . UIC franc (special settlement currency) International Union of Railways
XOF 952 0 CFA Franc BCEAO Benin, Burkina Faso, Côte d'Ivoire, Guinea-Bissau, Mali, Niger, Senegal, Togo
XPD 964 . Palladium (one troy ounce)
XPF 953 0 CFP franc French Polynesia, New Caledonia, Wallis and Futuna
XPT 962 . Platinum (one troy ounce)
XTS 963 . Code reserved for testing purposes
XXX 999 . No currency
YER 886 0 Yemeni rial Yemen
ZAR 710 2 South African rand South Africa
ZMK 894 0 Zambian kwacha Zambia
ZWL 932 2 Zimbabwe dollar Zimbabwe

History

In 1973, the ISO Technical Committee 68 decided to develop codes for the representation of currencies and funds for use in any application of trade, commerce or banking. At the 17th session (February 1978) of the related UN/ECE Group of Experts agreed that the three-letter alphabetic codes for International Standard ISO 4217, "Codes for the representation of currencies and funds", would be suitable for use in international trade.

Over time, new currencies are created and old currencies are discontinued. Frequently, these changes are due to new governments (through war or a new constitution), treaties between countries standardizing on a currency, or revaluation of the currency due to excessive inflation. As a result, the list of codes must be updated from time to time. The ISO 4217 maintenance agency (MA), SIX Interbank Clearing, is responsible for maintaining the list of codes

Code formation

The first two letters of the code are the two letters of ISO 3166-1 alpha-2 country codes (which are also used as the basis for national top-level domains on the Internet) and the third is usually the initial of the currency itself. So Japan's currency code is JPY—JP for Japan and Y for yen. This eliminates the problem caused by the names dollar, franc and pound being used in dozens of different countries, each having significantly differing values. Also, if a currency is revalued, the currency code's last letter is changed to distinguish it from the old currency. In some cases, the third letter is the initial for "new" in that country's language, to distinguish it from an older currency that was revalued; the code sometimes outlasts the usage of the term "new" itself (for example, the code for the Mexican peso is MXN). Other changes can be seen, however; the Russian ruble, for example, changed from RUR to RUB, where the B comes from the third letter in the word "ruble".
There is also a three-digit code number assigned to each currency, in the same manner as there is also a three-digit code number assigned to each country as part of ISO 3166. This numeric code is usually the same as the ISO 3166-1 numeric code. For example, USD (United States dollar) has code 840 which is also the numeric code for the US (United States).
The standard also defines the relationship between the major currency unit and any minor currency unit. Often, the minor currency unit has a value that is 1/100 of the major unit, but 1/1000 is also common. Some currencies do not have any minor currency unit at all. In others, the major currency unit has so little value that the minor unit is no longer generally used (e.g. the Japanese sen, 1/100th of a yen). This is indicated in the standard by the currency exponent. For example, USD has exponent 2, while JPY has exponent 0. Mauritania does not use a decimal division of units, setting 1 ouguiya (UM) = 5 khoums, and Madagascar has 1 ariary = 5 iraimbilanja.
ISO 4217 includes codes not only for currencies, but also for precious metals (gold, silver, palladium and platinum; by definition expressed per one troy ounce, as compared to "1 USD") and certain other entities used in international finance, e.g. Special Drawing Rights. There are also special codes allocated for testing purposes (XTS), and to indicate no currency transactions (XXX). These codes all begin with the letter "X". The precious metals use "X" plus the metal's chemical symbol; silver, for example, is XAG. ISO 3166 never assigns country codes beginning with "X", these codes being assigned for privately customized use only (reserved, never for official codes)—for instance, the ISO 3166-based NATO country codes (STANAG 1059, 9th edition) use "X" codes for imaginary exercise countries ranging from XXB for "Brownland" to XXR for "Redland", as well as for major commands such as XXE for SHAPE or XXS for SACLANT. Consequently, ISO 4217 can use "X" codes for non-country-specific currencies without risk of clashing with future country codes.

Supranational currencies, such as the East Caribbean dollar, the CFP franc, the CFA franc BEAC and the CFA franc BCEAO are normally also represented by codes beginning with an "X". The euro is represented by the code EUR (EU is included in the ISO 3166-1 reserved codes list to represent the European Union). The predecessor to the euro, the European Currency Unit (ECU), had the code XEU.

ISO 4217

SO 4217 is the international standard describing three-letter codes (also known as the currency code) to define the names of currencies established by the International Organization for Standardization (ISO). The ISO 4217 code list is the established norm in banking and business all over the world for defining different currencies, and in many countries the codes for the more common currencies are so well known publicly, that exchange rates published in newspapers or posted in banks use only these to define the different currencies, instead of translated currency names or ambiguous currency symbols. ISO 4217 codes are used on airline tickets and international train tickets to remove any ambiguity

Common money market instruments

Certificate of deposit - Time deposits, commonly offered to consumers by banks, thrift institutions, and credit unions.
Repurchase agreements - Short-term loans—normally for less than two weeks and frequently for one day—arranged by selling securities to an investor with an agreement to repurchase them at a fixed price on a fixed date.
Commercial paper - Unsecured promissory notes with a fixed maturity of one to 270 days; usually sold at a discount from face value.
Eurodollar deposit - Deposits made in U.S. dollars at a bank or bank branch located outside the United States.
Federal agency short-term securities - (in the U.S.). Short-term securities issued by government sponsored enterprises such as the Farm Credit System, the Federal Home Loan Banks and the Federal National Mortgage Association.
Federal funds - (in the U.S.). Interest-bearing deposits held by banks and other depository institutions at the Federal Reserve; these are immediately available funds that institutions borrow or lend, usually on an overnight basis. They are lent for the federal funds rate.
Municipal notes - (in the U.S.). Short-term notes issued by municipalities in anticipation of tax receipts or other revenues.
Treasury bills - Short-term debt obligations of a national government that are issued to mature in three to twelve months. For the U.S., see Treasury bills.
Money funds - Pooled short maturity, high quality investments which buy money market securities on behalf of retail or institutional investors.
Foreign Exchange Swaps - Exchanging a set of currencies in spot date and the reversal of the exchange of currencies at a predetermined time in the future.
Short-lived mortgage- and asset-backed securities

Overview

The money market consists of financial institutions and dealers in money or credit who wish to either borrow or lend. Participants borrow and lend for short periods of time, typically up to thirteen months. Money market trades in short-term financial instruments commonly called "paper." This contrasts with the capital market for longer-term funding, which is supplied by bonds and equity.
The core of the money market consists of banks borrowing and lending to each other, using commercial paper, repurchase agreements and similar instruments. These instruments are often benchmarked to (i.e. priced by reference to) the London Interbank Offered Rate (LIBOR) for the appropriate term and currency.
Finance companies, such as GMAC, typically fund themselves by issuing large amounts of asset-backed commercial paper (ABCP) which is secured by the pledge of eligible assets into an ABCP conduit. Examples of eligible assets include auto loans, credit card receivables, residential/commercial mortgage loans, mortgage-backed securities and similar financial assets. Certain large corporations with strong credit ratings, such as General Electric, issue commercial paper on their own credit. Other large corporations arrange for banks to issue commercial paper on their behalf via commercial paper lines.
In the United States, federal, state and local governments all issue paper to meet funding needs. States and local governments issue municipal paper, while the US Treasury issues Treasury bills to fund the US public debt.
Trading companies often purchase bankers' acceptances to be tendered for payment to overseas suppliers.
Retail and institutional money market funds
Banks
Central banks
Cash management programs
Arbitrage ABCP conduits, which seek to buy higher yielding paper, while themselves selling cheaper paper.
Merchant Banks

Risk aversion in forex

Risk aversion in the forex is a kind of trading behavior exhibited by the foreign exchange market when a potentially adverse event happens which may affect market conditions. This behavior is caused when risk averse traders liquidate their positions in risky assets and shift the funds to less risky assets due to uncertainty.[24]

In the context of the forex market, traders liquidate their positions in various currencies to take up positions in safe haven currencies, such as the US Dollar.[25] Sometimes, the choice of a safe haven currency is more of a choice based on prevailing sentiments rather than one of economic statistics. An example would be the Financial Crisis of 2008. The value of equities across world fell while the US Dollar strengthened (see Fig.1). This happened despite the strong focus of the crisis in the USA

Speculation

Controversy about currency speculators and their effect on currency devaluations and national economies recurs regularly. Nevertheless, economists including Milton Friedman have argued that speculators ultimately are a stabilizing influence on the market and perform the important function of providing a market for hedgers and transferring risk from those people who don't wish to bear it, to those who do.[19] Other economists such as Joseph Stiglitz consider this argument to be based more on politics and a free market philosophy than on economics.[20]
Large hedge funds and other well capitalized "position traders" are the main professional speculators. According to some economists, individual traders could act as "noise traders" and have a more destabilizing role than larger and better informed actors.[21]
Currency speculation is considered a highly suspect activity in many countries.[where?] While investment in traditional financial instruments like bonds or stocks often is considered to contribute positively to economic growth by providing capital, currency speculation does not; according to this view, it is simply gambling that often interferes with economic policy. For example, in 1992, currency speculation forced the Central Bank of Sweden to raise interest rates for a few days to 500% per annum, and later to devalue the krona.[22] Former Malaysian Prime Minister Mahathir Mohamad is one well known proponent of this view. He blamed the devaluation of the Malaysian ringgit in 1997 on George Soros and other speculators.
Gregory J. Millman reports on an opposing view, comparing speculators to "vigilantes" who simply help "enforce" international agreements and anticipate the effects of basic economic "laws" in order to profit.[23]

In this view, countries may develop unsustainable financial bubbles or otherwise mishandle their national economies, and foreign exchange speculators made the inevitable collapse happen sooner. A relatively quick collapse might even be preferable to continued economic mishandling, followed by an eventual, larger, collapse. Mahathir Mohamad and other critics of speculation are viewed as trying to deflect the blame from themselves for having caused the unsustainable economic conditions.

foreign exchange option

A foreign exchange option (commonly shortened to just FX option) is a derivative where the owner has the right but not the obligation to exchange money denominated in one currency into another currency at a pre-agreed exchange rate on a specified date. The FX options market is the deepest, largest and most liquid market for options of any kind in the world

currency future

Foreign currency futures are exchange traded forward transactions with standard contract sizes and maturity dates — for example, $1000 for next November at an agreed rate [4],[5]. Futures are standardized and are usually traded on an exchange created for this purpose. The average contract length is roughly 3 months. Futures contracts are usually inclusive of any interest amounts

foreign exchange swap

The most common type of forward transaction is the FX swap. In an FX swap, two parties exchange currencies for a certain length of time and agree to reverse the transaction at a later date. These are not standardized contracts and are not traded through an exchange

Financial instruments

One way to deal with the foreign exchange risk is to engage in a forward transaction. In this transaction, money does not actually change hands until some agreed upon future date. A buyer and seller agree on an exchange rate for any date in the future, and the transaction occurs on that date, regardless of what the market rates are then. The duration of the trade can be one day, a few days, months or years. Usually the date is decided by both parties. Then the forward contract is negotiated and agreed upon by both parties.

Financial instruments

A spot transaction is a two-day delivery transaction (except in the case of trades between the US Dollar, Canadian Dollar, Turkish Lira, EURO and Russian Ruble, which settle the next business day), as opposed to the futures contracts, which are usually three months. This trade represents a “direct exchange” between two currencies, has the shortest time frame, involves cash rather than a contract; and interest is not included in the agreed-upon transaction

Algorithmic trading in foreign exchange

Electronic trading is growing in the FX market, and algorithmic trading is becoming much more common. According to financial consultancy Celent estimates, by 2008 up to 25% of all trades by volume will be executed using algorithm, up from about 18% in 2005

Market psychology

Market psychology and trader perceptions influence the foreign exchange market in a variety of ways:
Flights to quality: Unsettling international events can lead to a "flight to quality," with investors seeking a "safe haven." There will be a greater demand, thus a higher price, for currencies perceived as stronger over their relatively weaker counterparts. The U.S. dollar, Swiss franc and gold have been traditional safe havens during times of political or economic uncertainty.[15]
Long-term trends: Currency markets often move in visible long-term trends. Although currencies do not have an annual growing season like physical commodities, business cycles do make themselves felt. Cycle analysis looks at longer-term price trends that may rise from economic or political trends.[16]
"Buy the rumor, sell the fact": This market truism can apply to many currency situations. It is the tendency for the price of a currency to reflect the impact of a particular action before it occurs and, when the anticipated event comes to pass, react in exactly the opposite direction. This may also be referred to as a market being "oversold" or "overbought".[17] To buy the rumor or sell the fact can also be an example of the cognitive bias known as anchoring, when investors focus too much on the relevance of outside events to currency prices.
Economic numbers: While economic numbers can certainly reflect economic policy, some reports and numbers take on a talisman-like effect: the number itself becomes important to market psychology and may have an immediate impact on short-term market moves. "What to watch" can change over time. In recent years, for example, money supply, employment, trade balance figures and inflation numbers have all taken turns in the spotlight.
Technical trading considerations: As in other markets, the accumulated price movements in a currency pair such as EUR/USD can form apparent patterns that traders may attempt to use. Many traders study price charts in order to identify such patterns

Political conditions

Internal, regional, and international political conditions and events can have a profound effect on currency markets.

All exchange rates are susceptible to political instability and anticipations about the new ruling party. Political upheaval and instability can have a negative impact on a nation's economy. For example, destabilization of coalition governments in Pakistan and Thailand can negatively affect the value of their currencies. Similarly, in a country experiencing financial difficulties, the rise of a political faction that is perceived to be fiscally responsible can have the opposite effect. Also, events in one country in a region may spur positive/negative interest in a neighboring country and, in the process, affect its currency.

Economic factors

These include: (a)economic policy, disseminated by government agencies and central banks, (b)economic conditions, generally revealed through economic reports, and other economic indicators.
Economic policy comprises government fiscal policy (budget/spending practices) and monetary policy (the means by which a government's central bank influences the supply and "cost" of money, which is reflected by the level of interest rates).
Government budget deficits or surpluses: The market usually reacts negatively to widening government budget deficits, and positively to narrowing budget deficits. The impact is reflected in the value of a country's currency.
Balance of trade levels and trends: The trade flow between countries illustrates the demand for goods and services, which in turn indicates demand for a country's currency to conduct trade. Surpluses and deficits in trade of goods and services reflect the competitiveness of a nation's economy. For example, trade deficits may have a negative impact on a nation's currency.
Inflation levels and trends: Typically a currency will lose value if there is a high level of inflation in the country or if inflation levels are perceived to be rising. This is because inflation erodes purchasing power, thus demand, for that particular currency. However, a currency may sometimes strengthen when inflation rises because of expectations that the central bank will raise short-term interest rates to combat rising inflation.
Economic growth and health: Reports such as GDP, employment levels, retail sales, capacity utilization and others, detail the levels of a country's economic growth and health. Generally, the more healthy and robust a country's economy, the better its currency will perform, and the more demand for it there will be.
Productivity of an economy: Increasing productivity in an economy should positively influence the value of its currency. Its effects are more prominent if the increase is in the traded sector

Determinants of FX rates

The following theories explain the fluctuations in FX rates in a floating exchange rate regime (In a fixed exchange rate regime, FX rates are decided by its government):
(a) International parity conditions: Relative Purchasing Power Parity, interest rate parity, Domestic Fisher effect, International Fisher effect. Though to some extent the above theories provide logical explanation for the fluctuations in exchange rates, yet these theories falter as they are based on challengeable assumptions [e.g., free flow of goods, services and capital] which seldom hold true in the real world.
(b) Balance of payments model (see exchange rate): This model, however, focuses largely on tradable goods and services, ignoring the increasing role of global capital flows. It failed to provide any explanation for continuous appreciation of dollar during 1980s and most part of 1990s in face of soaring US current account deficit.
(c) Asset market model (see exchange rate): views currencies as an important asset class for constructing investment portfolios. Assets prices are influenced mostly by people’s willingness to hold the existing quantities of assets, which in turn depends on their expectations on the future worth of these assets. The asset market model of exchange rate determination states that “the exchange rate between two currencies represents the price that just balances the relative supplies of, and demand for, assets denominated in those currencies.”
None of the models developed so far succeed to explain FX rates levels and volatility in the longer time frames. For shorter time frames (less than a few days) algorithm can be devised to predict prices. Large and small institutions and professional individual traders have made consistent profits from it. It is understood from above models that many macroeconomic factors affect the exchange rates and in the end currency prices are a result of dual forces of demand and supply. The world's currency markets can be viewed as a huge melting pot: in a large and ever-changing mix of current events, supply and demand factors are constantly shifting, and the price of one currency in relation to another shifts accordingly. No other market encompasses (and distills) as much of what is going on in the world at any given time as foreign exchange.

Supply and demand for any given currency, and thus its value, are not influenced by any single element, but rather by several. These elements generally fall into three categories: economic factors, political conditions and market psychology

Exchange

The main trading center is London, but New York, Tokyo, Hong Kong and Singapore are all important centers as well. Banks throughout the world participate. Currency trading happens continuously throughout the day; as the Asian trading session ends, the European session begins, followed by the North American session and then back to the Asian session, excluding weekends.
Fluctuations in exchange rates are usually caused by actual monetary flows as well as by expectations of changes in monetary flows caused by changes in gross domestic product (GDP) growth, inflation (purchasing power parity theory), interest rates (interest rate parity, Domestic Fisher effect, International Fisher effect), budget and trade deficits or surpluses, large cross-border M&A deals and other macroeconomic conditions. Major news is released publicly, often on scheduled dates, so many people have access to the same news at the same time. However, the large banks have an important advantage; they can see their customers' order flow.
Currencies are traded against one another. Each currency pair thus constitutes an individual trading product and is traditionally noted XXXYYY or XXX/YYY, where XXX and YYY are the ISO 4217 international three-letter code of the currencies involved. The first currency (XXX) is the base currency that is quoted relative to the second currency (YYY), called the counter currency (or quote currency). For instance, the quotation EURUSD (EUR/USD) 1.5465 is the price of the euro expressed in US dollars, meaning 1 euro = 1.5465 dollars. The market convention is to quote most exchange rates against the USD with the US dollar as the base currency (eg USDJPY, USDCAD, USDCHF). The exceptions are the British pound (GBP), Australian dollar (AUD), the New Zealand dollar (NZD) and the euro (EUR) where the USD is the counter currency (eg GBPUSD, AUDUSD, NZDUSD, EURUSD).
The factors affecting XXX will affect both XXXYYY and XXXZZZ. This causes positive currency correlation between XXXYYY and XXXZZZ.
On the spot market, according to the 2010 Triennial Survey, the most heavily traded bilateral currency pairs were:
EURUSD: 28%
USDJPY: 14%
GBPUSD (also called cable): 9%
and the US currency was involved in 84.9% of transactions, followed by the euro (39.1%), the yen (19.0%), and sterling (12.9%) (see table). Volume percentages for all individual currencies should add up to 200%, as each transaction involves two currencies.
Trading in the euro has grown considerably since the currency's creation in January 1999, and how long the foreign exchange market will remain dollar-centered is open to debate. Until recently, trading the euro versus a non-European currency ZZZ would have usually involved two trades: EURUSD and USDZZZ. The exception to this is EURJPY, which is an established traded currency pair in the interbank spot market. As the dollar's value has eroded during 2008, interest in using the euro as reference currency for prices in commodities (such as oil), as well as a larger component of foreign reserves by banks, has increased dramatically. Transactions in the currencies of commodity-producing countries, such as AUD, NZD, CAD, have also increased

Trading characteristics

There is no unified or centrally cleared market for the majority of FX trades, and there is very little cross-border regulation. Due to the over-the-counter (OTC) nature of currency markets, there are rather a number of interconnected marketplaces, where different currencies instruments are traded. This implies that there is not a single exchange rate but rather a number of different rates (prices), depending on what bank or market maker is trading, and where it is. In practice the rates are often very close, otherwise they could be exploited by arbitrageurs instantaneously. Due to London's dominance in the market, a particular currency's quoted price is usually the London market price. A joint venture of the Chicago Mercantile Exchange and Reuters, called Fxmarketspace opened in 2007 and aspired but failed to the role of a central market clearing mechanism.              


Most traded currencies[3]
Currency distribution of reported FX market turnover[14]Rank Currency ISO 4217 code
(Symbol)  % daily share
(April 2010)
1  United States dollar USD ($) 84.9%
2  Euro EUR (€) 39.1%
3  Japanese yen JPY (¥) 19.0%
4  Pound sterling GBP (£) 12.9%
5  Australian dollar AUD ($) 7.6%
6  Swiss franc CHF (Fr) 6.4%
7  Canadian dollar CAD ($) 5.3%
8  Hong Kong dollar HKD ($) 2.4%
9  Swedish krona SEK (kr) 2.2%
10  New Zealand dollar NZD ($) 1.6%
Other Currencies 18.6%
Total[notes 1] 200%

Money transfer/remittance companies

Money transfer companies/remittance companies perform high-volume low-value transfers generally by economic migrants back to their home country. In 2007, the Aite Group estimated that there were $369 billion of remittances (an increase of 8% on the previous year). The four largest markets (India, China, Mexico and the Philippines) receive $95 billion. The largest and best known provider is Western Union with 345,000 agents globally followed by UAE Exchange & Financial Services Ltd

Non-bank foreign exchange companies

Non-bank foreign exchange companies offer currency exchange and international payments to private individuals and companies. These are also known as foreign exchange brokers but are distinct in that they do not offer speculative trading but currency exchange with payments. I.e., there is usually a physical delivery of currency to a bank account. Send Money Home offers an in-depth comparison into the services offered by all the major non-bank foreign exchange companies.

It is estimated that in the UK, 14% of currency transfers/payments[12] are made via Foreign Exchange Companies.[13] These companies' selling point is usually that they will offer better exchange rates or cheaper payments than the customer's bank. These companies differ from Money Transfer/Remittance Companies in that they generally offer higher-value services.

Retail foreign exchange brokers

Retail traders (individuals) constitute a growing segment of this market, both in size and importance. Currently, they participate indirectly through brokers or banks. Retail brokers, while largely controlled and regulated in the USA by the CFTC and NFA have in the past been subjected to periodic foreign exchange scams.[10][11] To deal with the issue, the NFA and CFTC began (as of 2009) imposing stricter requirements, particularly in relation to the amount of Net Capitalization required of its members. As a result many of the smaller, and perhaps questionable brokers are now gone.
There are two main types of retail FX brokers offering the opportunity for speculative currency trading: brokers and dealers or market makers. Brokers serve as an agent of the customer in the broader FX market, by seeking the best price in the market for a retail order and dealing on behalf of the retail customer. They charge a commission or mark-up in addition to the price obtained in the market. Dealers or market makers, by contrast, typically act as principal in the transaction versus the retail customer, and quote a price they are willing to deal at—the customer has the choice whether or not to trade at that price.

In assessing the suitability of an FX trading service, the customer should consider the ramifications of whether the service provider is acting as principal or agent. When the service provider acts as agent, the customer is generally assured of a known cost above the best inter-dealer FX rate. When the service provider acts as principal, no commission is paid, but the price offered may not be the best available in the market—since the service provider is taking the other side of the transaction, a conflict of interest may occur.

Investment management firms

nvestment management firms (who typically manage large accounts on behalf of customers such as pension funds and endowments) use the foreign exchange market to facilitate transactions in foreign securities. For example, an investment manager bearing an international equity portfolio needs to purchase and sell several pairs of foreign currencies to pay for foreign securities purchases.

Some investment management firms also have more speculative specialist currency overlay operations, which manage clients' currency exposures with the aim of generating profits as well as limiting risk. Whilst the number of this type of specialist firms is quite small, many have a large value of assets under management (AUM), and hence can generate large trades.

Hedge funds as speculators

About 70% to 90%[citation needed] of the foreign exchange transactions are speculative. In other words, the person or institution that bought or sold the currency has no plan to actually take delivery of the currency in the end; rather, they were solely speculating on the movement of that particular currency. Hedge funds have gained a reputation for aggressive currency speculation since 1996. They control billions of dollars of equity and may borrow billions more, and thus may overwhelm intervention by central banks to support almost any currency, if the economic fundamentals are in the hedge funds' favor.

Forex Fixing

Forex fixing is the daily monetary exchange rate fixed by the national bank of each country. The idea is that central banks use the fixing time and exchange rate to evaluate behavior of their currency. Fixing exchange rates reflects the real value of equilibrium in the forex market. Banks, dealers and online foreign exchange traders use fixing rates as a trend indicator.

The mere expectation or rumor of central bank intervention might be enough to stabilize a currency, but aggressive intervention might be used several times each year in countries with a dirty float currency regime. Central banks do not always achieve their objectives. The combined resources of the market can easily overwhelm any central bank.[9] Several scenarios of this nature were seen in the 1992–93 ERM collapse, and in more recent times in Southeast Asia

Commercial companies

An important part of this market comes from the financial activities of companies seeking foreign exchange to pay for goods or services. Commercial companies often trade fairly small amounts compared to those of banks or speculators, and their trades often have little short term impact on market rates. Nevertheless, trade flows are an important factor in the long-term direction of a currency's exchange rate. Some multinational companies can have an unpredictable impact when very large positions are covered due to exposures that are not widely known by other market participants

Banks

The interbank market caters for both the majority of commercial turnover and large amounts of speculative trading every day. A large bank may trade billions of dollars daily. Some of this trading is undertaken on behalf of customers, but much is conducted by proprietary desks, trading for the bank's own account. Until recently, foreign exchange brokers did large amounts of business, facilitating interbank trading and matching anonymous counterparts for large fees. Today, however, much of this business has moved on to more efficient electronic systems. The broker squawk box lets traders listen in on ongoing interbank trading and is heard in most trading rooms, but turnover is noticeably smaller than just a few years ago.[citation needed]

Market participants

Unlike a stock market, the foreign exchange market is divided into levels of access. At the top is the inter-bank market, which is made up of the largest commercial banks and securities dealers. Within the inter-bank market, spreads, which are the difference between the bid and ask prices, are razor sharp and not known to players outside the inner circle. The difference between the bid and ask prices widens (for example from 0-1 pip to 1-2 pips for a currencies such as the EUR) as you go down the levels of access. This is due to volume. If a trader can guarantee large numbers of transactions for large amounts, they can demand a smaller difference between the bid and ask price, which is referred to as a better spread. The levels of access that make up the foreign exchange market are determined by the size of the "line" (the amount of money with which they are trading). The top-tier interbank market accounts for 53% of all transactions. After that there are usually smaller banks, followed by large multi-national corporations (which need to hedge risk and pay employees in different countries), large hedge funds, and even some of the retail FX market makers. According to Galati and Melvin, “Pension funds, insurance companies, mutual funds, and other institutional investors have played an increasingly important role in financial markets in general, and in FX markets in particular, since the early 2000s.” (2004) In addition, he notes, “Hedge funds have grown markedly over the 2001–2004 period in terms of both number and overall size”.[8] Central banks also participate in the foreign exchange market to align currencies to their economic needs.

Top 10 currency traders

Top 10 currency traders [6]
% of overall volume, May 2010Rank Name Market share
1  Deutsche Bank 18.06%
2  UBS AG 11.30%
3  Barclays Capital 11.08%
4  Citi 7.69%
5  Royal Bank of Scotland 6.50%
6  JPMorgan 6.35%
7  HSBC 4.55%
8  Credit Suisse 4.44%
9  Goldman Sachs 4.28%
10  Morgan Stanley 2.91%

Foreign exchange trading increased by 20% between April 2007 and April 2010 and has more than doubled since 2004.[7] The increase in turnover is due to a number of factors: the growing importance of foreign exchange as an asset class, the increased trading activity of high-frequency traders, and the emergence of retail investors as an important market segment. The growth of electronic execution methods and the diverse selection of execution venues have lowered transaction costs, increased market liquidity, and attracted greater participation from many customer types. In particular, electronic trading via online portals has made it easier for retail traders to trade in the foreign exchange market. By 2010, retail trading is estimated to account for up to 10% of spot FX turnover, or $150 billion per day (see retail trading platforms).

Because foreign exchange is an OTC market where brokers/dealers negotiate directly with one another, there is no central exchange or clearing house. The biggest geographic trading centre is the UK, primarily London, which according to TheCityUK estimates has increased its share of global turnover in traditional transactions from 34.6% in April 2007 to 36.7% in April 2010. Due to London's dominance in the market, a particular currency's quoted price is usually the London market price. For instance, when the IMF calculates the value of its SDRs every day, they use the London market prices at noon that day.

Market size and liquidity

The foreign exchange market is the largest and most liquid financial market in the world. Traders include large banks, central banks, institutional investors, currency speculators, corporations, governments, other financial institutions, and retail investors. The average daily turnover in the global foreign exchange and related markets is continuously growing. According to the 2010 Triennial Central Bank Survey, coordinated by the Bank for International Settlements, average daily turnover was US$3.98 trillion in April 2010 (vs $1.7 trillion in 1998).[3] Of this $3.98 trillion, $1.5 trillion was spot foreign exchange transactions and $2.5 trillion was traded in outright forwards, FX swaps and other currency derivatives.
Trading in London accounted for 36.7% of the total, making London by far the most important global center for foreign exchange trading. In second and third places respectively, trading in New York City accounted for 17.9%, and Tokyo accounted for 6.2%.[4]
Turnover of exchange-traded foreign exchange futures and options have grown rapidly in recent years, reaching $166 billion in April 2010 (double the turnover recorded in April 2007). Exchange-traded currency derivatives represent 4% of OTC foreign exchange turnover. FX futures contracts were introduced in 1972 at the Chicago Mercantile Exchange and are actively traded relative to most other futures contracts.

Most developed countries permit the trading of FX derivative products (like currency futures and options on currency futures) on their exchanges. All these developed countries already have fully convertible capital accounts. A number of emerging countries do not permit FX derivative products on their exchanges in view of controls on the capital accounts. The use of foreign exchange derivatives is growing in many emerging economies.[5] Countries such as Korea, South Africa, and India have established currency futures exchanges, despite having some controls on the capital account

Foreign exchange market

e foreign exchange market (forex, FX, or currency market) is a worldwide decentralized over-the-counter financial market for the trading of currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends. The foreign exchange market determines the relative values of different currencies.[1]

The primary purpose of the foreign exchange is to assist international trade and investment, by allowing businesses to convert one currency to another currency. For example, it permits a US business to import British goods and pay Pound Sterling, even though the business's income is in US dollars. It also supports speculation, and facilitates the carry trade, in which investors borrow low-yielding currencies and lend (invest in) high-yielding currencies, and which (it has been claimed) may lead to loss of competitiveness in some countries.[2]

In a typical foreign exchange transaction, a party purchases a quantity of one currency by paying a quantity of another currency. The modern foreign exchange market began forming during the 1970s when countries gradually switched to floating exchange rates from the previous exchange rate regime, which remained fixed as per the Bretton Woods system.

The foreign exchange market is unique because of
its huge trading volume, leading to high liquidity;
its geographical dispersion;
its continuous operation: 24 hours a day except weekends, i.e. trading from 20:15 GMT on Sunday until 22:00 GMT Friday;
the variety of factors that affect exchange rates;
the low margins of relative profit compared with other markets of fixed income; and
the use of leverage to enhance profit margins with respect to account size.

As such, it has been referred to as the market closest to the ideal of perfect competition, notwithstanding currency intervention by central banks. According to the Bank for International Settlements,[3] as of April 2010, average daily turnover in global foreign exchange markets is estimated at $3.98 trillion, a growth of approximately 20% over the $3.21 trillion daily volume as of April 2007.

The $3.98 trillion break-down is as follows:
$1.490 trillion in spot transactions
$475 billion in outright forwards
$1.765 trillion in foreign exchange swaps
$43 billion currency swaps
$207 billion in options and other products

e currency band is a system of exchange rates by which a floating currency is backed by hard money.
A country selects a range, or "band", of values at which to set their currency, and returns to a fixed exchange rate if the value of their currency shifts outside this band. This allows for some revaluation, but tends to stabilize the currency's value within the band. In this sense, it is a compromise between a fixed (or "pegged") exchange rate and a floating exchange rate. For example, the exchange rate of the renminbi of the mainland of the People's Republic of China has recently been based upon a currency band; the European Economic Community's "snake in the tunnel" was a similar concept that failed, but ultimately led to the establishment of the European Exchange Rate Mechanism (ERM) and ultimately the Euro.

n finance, the exchange rates (also known as the foreign-exchange rate, forex rate or FX rate) between two currencies specify how much one currency is worth in terms of the other. It is the value of a foreign nation’s currency in terms of the home nation’s currency.[1] For example an exchange rate of 91 Japanese yen (JPY, ¥) to the United States dollar (USD, $) means that JPY 91 is worth the same as USD 1. The foreign exchange market is one of the largest markets in the world. By some estimates, about 3.2 trillion USD worth of currency changes hands every day.
The spot exchange rate refers to the current exchange rate. The forward exchange rate refers to an exchange rate that is quoted and traded today but for delivery and payment on a specific future date.