Экономические науки/ 3.Финансовые отношения

N. Baitorova F-31k

Aitbek S. K., MSc, Senior Lecturer

Karaganda Economic University of Kazpotrebsoyuz

HISTORY OF THE FOREIGN EXCHANGE MARKET.

MAJOR WORLD CURRENCIES

The foreign exchange market (FOREX) is a set of operations on purchase and sale of foreign currency, and the provision of loans for specific conditions (amount, exchange rate, interest rate) with the performance of a certain date. The main participants in the foreign exchange market are commercial banks, currency exchanges, central banks, firms engaged in foreign trade transactions, investment funds, brokerage companies; growing directly involved in foreign exchange transactions of individuals.

The FOREX is the biggest market in the world. It constitutes up to 90% of the world capital market. Thousands of participants in this market are banks, brokerage firms, and investment funds, financial and insurance companies. They buy and sell currencies 24 hours a day, make deals within seconds anywhere in the world. Combined into a single global network of satellite communication channels with the help of advanced computer systems, they create a turnover of foreign currency, which exceeds the total annual GNP for the year in all countries of the world [4].

Why such a huge movement of the money supply by electronic means? Currency transactions provide economic ties between participants of different markets, situated on either side of frontiers: interstate calculations, payments between companies from different countries for the goods and services, foreign investment, international tourism and business travel. Foreign exchange transactions could not exist without these important types of economic activities. But the money become a commodity here, as supply and demand for each currency transactions in various business centers varies in time, and therefore the price of each currency changes rapidly and in unexpected ways.

Today the international monetary device is based on floating exchange rate regime: price of the currency is determined primarily by the market. Therefore, the exchange rate rises (currency gets more expensive), and then falls down. So, it is possible to buy a cheaper currency and after some time sell it for more expensive price. The international monetary system has come a long way over the millennia of human history, but certainly today it is changing in the most interesting and previously unthinkable ways [3].

Two main changes determine a new image of the global monetary system:

a) The money is now completely separated from any tangible medium;

b) Powerful information and communication technologies brought monetary systems of different countries into a single global financial system that does not recognize borders.

Previously, it was quite simple and clear: "People are dying for the metal". And now the money is not only metal, but not even those eyes green heat tracing paper. Real money, driving the fate of people facing the country and the people, destroying the empire and create new one, today the money is just numbers on a computer screen.

The foreign exchange market was created after 1973, but the beginning of its recent history was in the summer of 1944 in the American resort town of Bretton Woods. The outcome of the Second World War is no longer in doubt and its allies do post-war financial architecture of the world. While the economies of all the leading nations after the war had to be in ruins or in the grip of military production, the US economy was out of the war. And as the winners and the victims were in need of food, fuel, raw materials and equipment, and only the US economy could give it all in sufficient quantity, the was what other countries will pay for it. After the war, they had a little of what might be interested in the US; gold reserves were in the United States, and most countries did not have it at all. Any attempt to establish trade through the exchange of currencies was useless, as the price of the dollar was bound to rise to a level that all other currencies depreciated would purchase American goods became impossible [1].

On the other hand, it could be considered anyone's problem, besides the United States. The world experienced a strong dollar shortage, the gold reserves of countries flowed into the US, other currencies were depreciated. Natural, but short-sighted protectionist solutions isolated economy apart and economic nationalism is easily moved into diplomatic relations and escalated into war.

To prevent the collapse of the post-war currency financial forum in Bretton Woods created a number of financial institutions including the International Monetary Fund, that was originally a joint currency resource, where everyone (but the maximum extent the US) had to pay its share, and where each country can take money to maintain its currency. For the US dollar was fixed gold content (35 dollars per troy ounce), and other currencies were pegged to the dollar at a certain ratio (fixed exchange rates).

But the post-war demand for the dollar was above all expectations. Many countries were selling their currency to buy dollars on the purchase of American goods. US exports far exceeded imports (growing trade surplus), deficit of dollars in the world was growing. IMF resources were not enough for borrowing countries to support their currencies. The answer to these problems was an American Marshall Plan, for which European countries have provided a list of the United States needed to lift their economies material resources, and the US gave them (not a loan) amount of dollars, enough to purchase specified. These dollars have prevented the devaluation of other currencies, contributed to a resurgence of US exports, opening up for him new markets.

American presence in all parts of the world through the cost of maintaining military bases, American private business investment in Europe (acquisition of European companies or participation in them), the activity of American tourists to spend money around the world, gradually filled dollars of foreign banks in amounts more than necessary. In the late 50's European business is no longer needed the same amount of American goods, and was more attractive investment opportunities than dollar deposits, and therefore did not wish to keep the excess dollars. Initially, the US Treasury was ready to redeem dollars, paying for their gold content set, preventing the fall of the dollar against other currencies. But the flow of gold from the United States led to a halving of gold reserves and early 60s. Foreign central banks also supported the dollar against the national currency for a long time, buying surplus dollars offered by the public, private banks and businesses.

Fixed exchange rate system lasted until the early 70-ies. By this time the United States has had a favorable trade balance; other countries became selling goods America more and buy less. Dollars settled in foreign central banks unpromising unclaimed cargo. For several years, the United States resisted the inevitable devaluation of the dollar and did not agree to the establishment of freely floating exchange rates, but after a series of problems in the early '70s they abandoned the gold content of the dollar exchange rate which has determined by market supply and demand (free-floating course). The price of gold rose in 1980 to almost $ 750 per troy ounce. In the late 70s, the dollar fell to its post-war low, and further its history was a series of ups and downs.

All the world's major currencies are now in such a mode of free swimming when the price determined by the market, depending on how this currency needed to purchase goods, investment and interstate settlements. Of course, this journey is not completely free; every country has a central bank, whose main task, in accordance with the law is to ensure the stability of the national currency. The international currency market FOREX unites all participants a lot of foreign exchange transactions: individuals, companies, investment institutions, banks and central banks.

Major currencies, which account for the bulk of all transactions in the market FOREX, are today the US dollar (USD), euro (EUR), Japanese Yen (JPY), Swiss franc (CHF) and the British pound sterling (GBP). Before the advent of the euro currency market accounted for a large share of the German Mark (DEM).

US Dollar (USD), as we have seen, has become a leading world currency after the Second World War. Today, the dollar is a universal means of payment in international business, a safe haven for various financial and political crises in other countries, as well as the object of international investment, due to the large volume of highly reliable securities - government long-term US bonds. Confidence in the stability of the US economic and financial system, including all revenues on government debt securities will be paid in a timely manner, not requisitioned and unexpected tax levied attracted to this market as private foreign investors and foreign governments.

In recent years, unprecedented growth demonstrates the US stock market, attracting huge capital foreign and domestic investors, which serves as an additional source of strength of the dollar. Since the mid-80s, US stocks have become more profitable option of investing money than gold: the stock rose, and the price of gold fell. In the period after the 1993 US stocks were rising so fast that it was not only independent experts and officials have repeatedly expressed concern that overly inflated stock prices and their decline may be too harsh and lead to financial and economic crisis.

Dollar takes, according to various estimates, the proportion of 50 to 61 per cent in the international reserves of central banks that make up a total of up to $ 1 trillion. It is widely recognized as the base currency at the quotation of other currencies. The dollar is involved as a party in 87% of all transactions in the market FOREX (as of October 1998). In all the Japanese yen exchange the share of the US dollar accounted for 87%; for the German mark, the figure was 64% and the Canadian dollar - 98%.

Japanese Yen (JPY) has passed a difficult way from the post-war level of 360 yen per dollar, certain American occupation administration, before the course of about 80 yen per dollar in 1995, after which it was again significantly decreased the level and again very strongly strengthened in the second half of 1998.

The main feature of the financial situation in Japan today are extremely low short-term interest rates; practically they are today supported by the Bank of Japan at zero. It is therefore very high savings and pension funds and other investors have invested in foreign securities, primarily - in US government bonds and European assets. Essentially giving the dollar as a reserve currency and instrument for International Settlements, nevertheless the yen is one of the main currencies in the international financial market.

British Pound (GBP). The British pound was the world's leading currency until the First World War; significantly weakening its position in the interwar period, it finally conceded leadership dollar after World War II, the cause of which were natural problems in the war-torn economy, as well as undermining confidence in the currency as a result of massive сounterfeiters sabotage against it from Germany during the war.

Up to 50% of transactions involving pound occur on the market in London. In the global market it takes about 14%. Nearly all of this volume is the dollar and the German mark. New York banks stop practically GBP at noon. Pound is very sensitive to the data on the labor market and inflation in the UK, as well as to oil prices (in textbooks on the foreign exchange market, it was described as petrocurrency). In commenting on the events of the FOREX market pound designated as either cable, or pound. The first name is left from the days when most operational data obtained in Europe from America, telegrams were sent via transatlantic submarine cable. Cable is used, usually in quotation GBP to USD, a pound is priced in pounds applied to the German mark.

Swiss Franc (CHF). The volume of transactions involving the Swiss franc significantly less than with other considered currencies. In relation to the German mark, it is often played the role of safe haven (for example, in the case of crisis in Russia). According to previous years, the franc showed stronger fluctuations than the rate of the German mark; but in recent years it has taken place. The function of the franc as safe-haven (safe-haven) in 1999 was strongly reduced because of the military conflict in the Balkans[2].

With the advent of the euro volatility (volatility) of the franc against the euro is much less than it was on the volatility of the franc against the German mark. Swiss National Bank (SNB) pursues a policy aimed at coordinating the financial conditions in Switzerland and the euro-region; in particular, on the day of lower interest rates by the European Central Bank in the spring of this year, SNB 20 minutes announced reduction of its interest rate.

Although the bulk of the exchange takes place with the participation of the dollar, however, some non-dollar markets also have significant activity. Of the total volume of non-dollar market before about 98% were German marks. After the advent of the euro volumes in many markets decreased and still not fully recovered.

German Mark (DEM) is the second one after the US dollar compared to its share in global foreign exchange reserves (about 25%). With regard to exchange rate stability, to mark strongly influenced by socio-political factors in Russia, with which Germany is most closely linked economic and political relations, and this influence is transferred to the new euro currency, as Germany represents a significant part of the economy of eleven states, pooling their monetary systems.

The new currency, the euro (EUR), on 1 January 1999, brought together 11 European nations in the most powerful economic bloc of the world, which accounts for almost a fifth of global output of goods and services and world trade. The composition of the euro-region («Euro-area») includes Austria, Belgium, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal, Finland, France, occupying the territory of 2,365,000 square meters and population of 291 million people (for comparison - in the US 269 million, in Japan - 126).

The total gross domestic product (GDP) in 1997 was 5.55 trillion ECU (ECU-European Currency Unit), or 6.51 trillion US dollars, while the US GDP was 6.85 trillion ECU, and Japan - 3.71 trillion. Exports account for 10% of the GDP of the Euro-region. In 1997, total exports by 25% exceeded the American and half Japanese. Germany is up to 30% of Europe's economy; in the sum of Germany, France and Italy account for about 70% of the economy of the Euro-region[2].

Average consumer price inflation in October 1998 was 1.0%; key interest rates were reduced 11 European central banks to 3.0% in autumn 1998. The average unemployment rate stood at the beginning of 1999 by 10.8%, varying from 18.2% in Spain and 2.2% in Luxembourg.

The creation of the single European currency is certainly the greatest financial experiment in human history. None of the previous attempts to create any significant fiscal union was not successful. The euro today, many are also seen as an experiment whose outcome will not necessarily be successful. Throughout the first half of 1999 the exchange rate has been steadily falling, in what some see signs of confidence in the new currency, while others see the effective conductivity of a single European Central Bank monetary policy, as the lower exchange rate plays into the hands of European exporters, significantly increasing the competitiveness of their goods on the world markets.

The path of European states to unite monetary systems was long and not simple, not all countries can withstand the conditions laid down for the association to change the composition of participants. But within a few years it was recognized as the world's synthetic currency ECU (ECU), composed of European currencies (its rate at 31 December 1998 and became the Euro); persistent efforts of leaders of several European countries, primarily Germany, France, Italy, led in the end to the start of the new currency.

For a better understanding of the ongoing euro-region processes is useful to remember the macroeconomic targets which the European states came to unite their monetary systems.

Price stability: the average inflation rate for the preceding year must not exceed by more than 1.5% inflation rates of three of the Unites States with the lowest inflation.

The criterion of convergence of interest rates, which means that during the previous year the average long-term interest rates should not exceed more than 2% of the interest rates of the three countries with the greatest price stability. Interest rates are measured on the basis of indicators of long-term government bonds or similar form securities, taking into account differences in national definitions.

Condition of participation in the European exchange mechanism (ERM) for two years before moving to the currency EURO, particularly in this period should not be devaluation of cross-currency rate against the currencies of other participating States.

1. Likhovidov V.N. Fundamental analysis of the world's currency markets: forecasting methods and decision-making, 2008.

2. Luke K., Alphina M. Trading on the world currency markets, 2005 – 720p.

3. Maksimov B. Basics success of currency speculation. How to learn to earn on exchange major currencies, 2007 – 320p.

4. Schegoleva N.G. Foreign exchange market and foreign exchange transactions. Moscow Financial and Industrial Academy, 2005 – 157p.