The US Dollar has, since the end of WW2, been the currency that most other currencies trade against in the forex market, as America was the only major country to emerge in a relatively strong economic position. The US Dollar was chosen as the world’s currency reserve at a conference held in America in 1944.
A system was agreed of having exchange rates pegged against the US Dollar, which at the time was based upon the gold standard of USD $35 per ounce. The system altered in the 1970’s when the link between a set gold price stopped (and you should note that gold is currently trading at record highs in excess of USD $1,300 per ounce).
The US Dollar was and is still the most traded currency and represents over 86 percent of all forex trades. Currencies always trade in pairs as the value of each currency is measured against that of another currency. Some common pairs include: USD/EUR, USD/CAD, USD/GBP and USD/JPY. However, the international market place for traded currencies has changed. The US dollar has controlled the import/export markets for a long time, but many American businesses have found that using foreign currency brokers can offer better solutions.
Exchange rates are created by businesses worldwide trading on the forex market. However, many countries such as China and other Asian countries have started to manipulate the market which has had severe effects on America. American exports effectively fund American imports, but recently imports have exceeded exports resulting in record level deficits which are adversely affecting economic performance. The resulting trade deficit means there is an excess of US Dollars in the international currency markets. This has driven down the value of the dollar, which in turn increases the cost of imports, though some countries print excess domestic currency and this keeps those currencies at a false level, meaning their exports are cheap continue to be relatively cheap, or in other terms, their exports are being artificially subsidized.
The affect is such that American businesses have to borrow in foreign currency, and an increasing number of American businesses use the services of foreign currency brokers. Working with foreign currencies can result in increased expenses and reduced profitability. It affects long-term planning and can enhance the commercial risk facing a business. The concept of using foreign currency brokers is to use their expertise in the markets to assist in making informed decisions and to get a competitive advantage over the competition.
Foreign currency brokers offer businesses a dedicated forex specialist who gets to understand the business and make improvements. This is all about risk management and the best strategies for dealing with foreign currency exchange. It also helps to protect a company’s funds and to maximise the benefits of currency fluctuations.
Foreign currency brokers act as agents to their customers and attempt to get the best price. In return, brokers charge commission for their work based on traded volumes and returns. This incentivizes the brokers to do the best for his client. It’s important a company selects its foreign currency broker with care: there are thousands of brokers offering their services. Always ensure a broker is properly regulated. In America the regulatory bodies are the Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA).
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