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FOREX is the simultaneous buying of one currency and selling of another. Forex is a large financial market which is much bigger than the stock market. Forex daily trade volume exceeds $3 billion. Forex is an off-the-board market where the operations are conducted through brokers. The trading continues 24 hours a day, 5 days a week. With the help of brokers, it is possible to trade almost all currencies. Currencies, as a rule, are denoted by three letters, the two letters from the beginning denote the country, and the third letter - the name of the currency. The most liquid are considered to be the US dollar (USD), the euro (EUR), the Japanese yen (JPY), the British pound (GBP) and the Swiss franc (CHF).
A price of one currency versus another is constantly changing (rising or falling). For example, if we say that the US dollar is decreasing, it is not clear, as the US dollar can rise versus the Australian dollar and fall against the euro. Currencies are always traded in pairs. As currencies are quoted one versus another, the names of the currencies can be divided with a slash (/) and are written in the following way: EUR/USD.
Currency pairs correspond to the ratio of currency prices making up the pair. For example, the price of the EUR/USD pair shows how many dollars you can buy for 1 euro. The first currency in the pair is a base currency and the second one is the currency of quoting or quote currency. The euro is a base currency versus other major world currencies. There are the following base currency pairs:
| Symbol | Name | Colloquial Phrase |
|---|---|---|
| EUR/USD | Euro, US dollar | Euro |
| USD/JPY | US dollar, yen | Yen |
| GBP/USD | pound, dollar | Sterling or Cable |
| USD/CHF | US dollar, franc | Swissy |
| AUD/USD | Australian dollar, US dollar | Aussie |
| USD/CAD | US dollar, Canadian dollar | Loonie |
| NZD/USD | New Zealand dollar, US dollar | Kiwi |
There are so-called majors, for which around 75% of all market operations on Forex are held: the EUR/USD, GBP/USD, USD/CHF, and USD/JPY. As we see, the US dollar is represented in all currency pairs, thus, if a currency pair contains the US dollar, this pair is considered as a major currency pair. Pairs which do not include the US dollar are called cross currency pairs, or cross rates. The following cross rates are the most actively traded:
| Symbol | Name |
|---|---|
| EUR/CHF | euro-franc |
| EUR/GBP | euro-sterling |
| EUR/JPY | euro-yen |
| GBP/JPY | sterling-yen |
| AUD/JPY | aussie-yen |
| NZD/JPY | kiwi-yen |
The general reasons for this "sterling crisis" are said to be the participation of Great Britain in the European currency system with fixed exchange rate corridors; recently passed parliamentary elections; a reduction of industrial output; the Bank of England efforts to hold the parity rate for the Deutschemark, as well as dramatic outflow of investors. At the same time, due to a profitability slant the German currency market became more attractive than the English one. All in all, the speculators were rushing to sell the pounds for the Deutschemarks and for the US dollars. Consequences of the currency crisis were as follows: a sharp increase of the interest rate from 10% to 15%, the British Government had to accept pound devaluation and to secede from the European Monetary System. As a result, the pound returned to a floating exchange rate.
From the mid 80-es yen ratings started rising actively versus the US dollar. In early 90-es a lively economic development turned into a standstill in Japan, the unemployment increased; earnings and wages slided as well as living standards of the country population.
And from the beginning of 1991, this caused bankruptcies of numerous financial organizations in Japan. As a consequence, the quotes on Tokyo Stock Exchange collapsed, yen devaluation took place, thereafter, a new wave of bankruptcies among manufacturing companies began. In 1995 a historical low of the USD/JPY pair was recorded at -79.80.
This started in 1997-1998 Asian crisis led to the yen crash. It resulted in a tumble of yen-US dollar pair from 115 yens per one US dollar to 150.
The global economic crisis touched almost all fields of human activities. Forex currency market was no exception. Though, Forex participants (central banks, commercial banks, investment banks, brokers and dealers, pension funds, insurance companies and transnational companies) were in a difficult position, Forex market continues to function successfully, it is stable and profitable as never before.
The financial crisis has led to drastic changes of the world's currencies values. During the crisis, the yen strengthened most of all against all other currencies. Neither the US dollar, nor the euro, but the yen proved to be the most reliable currency instrument for traders. One of reasons for such strengthening can be that the traders needed to find a sanctuary amid a monetary chaos. Other specialists explained the uprise of yen rates by refusing from carry trade deals. Thus, below there are currency changes of the major yen pairs.
| The currency pair | Value before the crisis (08/2008) | Value after the crisis (01/2010) | Change in % |
|---|---|---|---|
| USD/JPY | 110.38 | 89.97 | -18.5 |
| GBP/JPY | 213.50 | 142.79 | -33.22 |
| EUR/JPY | 168.48 | 122.16 | -27.5 |
From the table we see that yen added over 18% versus US dollar, 27.5% - against euro and 33% - versus pound. Among the most strengthened currencies the US dollar took the fourth place. Strange as it may seem, US dollar remains the most reliable currency in the world, irrespective of the advancing recession in the USA, a fall of the country's financial system, spending of $750 billion on Paulson's plan of economic recovery and the constantly growing foreign debt amounting to dozens of billions USD. Investors still rely on it. Below there is a table of currency rate changes versus the Greenback.
| The currency pair | Value before the crisis (08/2008) | Value after the crisis (01/2010) | Change in % |
|---|---|---|---|
| EUR/USD | 1.5619 | 1.4328 | -8.3 |
| USD/CHF | 1.0820 | 1.0555 | -2.5 |
| GBP/USD | 1.9774 | 1.5990 | -19.2 |
From the data above it can be seen that US dollar gained 8.3% against euro and 19.2% versus pound. Relatively yen and franc a fall was fixed. In the first case, by 18.5%, the second - by 2.5%.
Among the strengthened currencies euro took the 12th position. Negative factors were: lowering of GDP and production of the largest Eurozone countries (Germany, France and Italy), fears about recession in the EU, reports about production stagnation, inflation and huge foreign debts of EU members, in particular Portugal, Ireland, Spain and Greece. As for the latter, there is a threat of its secession from the Eurozone. The fall of euro was provoked by investors refusal from this currency in favor of safer currencies (the US dollar and the yen). The table of currency rates change versus euro is given below:
| The currency pair | Value before the crisis (08/2008) | Value after the crisis (01/2010) | Change in % |
|---|---|---|---|
| EUR/CHF | 1.6352 | 1.4747 | -8.8 |
| EUR/GBP | 0.7900 | 0.8991 | 13.8 |
| EUR/AUD | 1.6974 | 1.5658 | -7.7 |
During the financial crisis the euro had weakened against the following major currencies: the US dollar - by 8.3%, the yen - by 27.5%, the franc -by 8.8% and the Aussie - by 7.7%. From all stated above, we can say that Forex market, unlike the stock and other business activities did not suffer after the global economic crisis, on the contrary, it benefited.
Many currency market participants gained, their crisis period yield rate turned to be fabulous. In such situation, many people see an escape from crisis exactly in Forex. As they often say in China: a crisis involves not only perturbations in the economy and social strain, but it is also a favourable time for investments and for numerous problems solving.
