The forex rate exchange rate regimes that are prominent today didn't exactly start the way it exists now. Initially, before the inception of the foreign exchange markets, the gold standard was the norm where the value of a country's currency was tied to the gold it possessed. The effect of keeping inflation in check was served by the value of money backed by a fixed asset-gold. However, this standard limited the competitive advantage of countries that didn't hold abundant gold reserves and failed to consider businesses and individuals' value resourcefulness to an economy. Thus, the US ended the Gold standard in 1971.
A new global monetary system was established in 1944, enforced by the Bretton Woods agreement wherein a global currency replaced the gold standard. However, the Bretton Woods fixed exchange rate system collapsed after three decades. Since the US had 75% of the world's gold supply at that time, the maintenance of a fixed exchange rate by countries between their currency and the US dollar led to the dollar's increased value and demand.
In a failed attempt to revive the fixed exchange rates, US President Richard Nixon temporarily suspended the dollar's convertibility to gold in 1971. By March 1973, with the inception of major currencies floating against each other, the modern foreign exchange market started its shift from a fixed exchange rate to a floating exchange rate system. Thus, a global decentralized, over the counter (OTC) market for trading currencies evolved, determining the forex rates for each currency.
The evolution of the fixed and floating exchange rate system witnessed new emergences and many downfalls over the years ranging from the International Gold Standard during 1875-1914 to the Bretton Woods System during 1945-1972 to morph into the foreign exchange system prevalent today. The shift has been noticed in not just the evolving systems but also the preferences of countries and its outlook towards the pegged and floating exchange regime with the development of economies and trade. While during the mid-1970s, a massive chunk of countries, amounting to nearly 83%, had some sort of pegged exchange rate, the 1990s observed the gravitation of economies towards the floating exchange rate system.
Depending upon whether the foreign currency exchange rates fluctuate constantly or not, there are two types of exchange rates: fixed and flexible exchange rates. The government of a country can allow the market forces and the economic condition to determine the rate of conversion, or the government can fix a rate by pegging the value of their currency with a stronger and stable currency of another country. No consensus has been reached regarding the perfect foreign exchange rate regime for an economy as the benefits that a country gets would be dependent on characteristics like inflation rate, the magnitude of financial development, size of the economy, capital mobility, etc.
The official rate set and maintained by the government is the fixed or pegged foreign exchange rate. A country holds forex reserves in order to sustain the determined pegged rate agreed between the participating countries and thus witnesses the buying and selling of its own currency by the central bank in the forex market. In a country with fixed exchange rates, the home currency's value is pegged to a major world currency that enables, especially, for the weaker economies to benefit from stimulated trade and greater certainty of navigation against adverse market movements and an upper hand in terms of forex risk management.
Depending on the working mechanism of the fixed exchange rate system, it is classified into the following:
Contrary to the pegged exchange rate, the private market drives and determines the floating exchange rates through supply and demands. It is also referred to as flexible exchange rates. Due to the volatile nature of the forex market and the various factors influencing it, the floating exchange rates fluctuate constantly. The possibility of the central bank's intervention to ensure stability and avoid inflation is not completely absent. Following are the types of floating exchange rates:
While a basic understanding of the forex market can enable informed forex decisions, the benefits that an organisation or an individual can get from professional guidance is also remarkable. Myforexeye provides forex solutions like transaction process outsourcing, forex risk management strategies, Dr. forex for forex risk advisory, smooth and quick trade finance, access to live forex rates and regular market updates to simplify forex for individuals, traders and firms while enhancing the savings on their forex transactions.
Myforexeye is your destination to get all your forex needs, whether it be individual or organizational and irrespective of their scale, resolved. Our Specialized team is armed with advanced technology and the expertise of experienced professionals to extend convenient solutions that simplify forex for you while dispensing important information and quality research. Our user-friendly web portal and mobile app reinforced by our transparent streamlined process and service empower users to make savings and insight into real-time rates and best quotations from banks to equip you with the best possible options. One can also mitigate their forex risks through our expert consultation and risk advisory services available on a transitional basis and available whenever the need for it arises.
Speak to one of our specialists to acquire a detailed understanding of Myforexeye forex services.
Disclaimer- The website is to provide information only
10 Mar 2021 05:00 PM
It operates for five days a week and 24 hours a day wherein currency is traded electronically, the value of which is dictated by the fluctuating foreign currency exchange rates. The forex market's importance is not just confined to larger corporation
04 Mar 2021 03:08 PM
Contrary to popular beliefs, the forex market's importance is not just constricted to commercial banks and large corporations. The smallest of the operations involving an individual
11 Aug 2020 07:01 PM
Online currency trading platforms and a reduced barrier to entry, Forex or currency trading has witnessed a surge in individual investors' participation.
21 Jul 2020 06:13 PM
A country’s exchange rate and its imports and exports hold a complicated relationship as there is a constant feedback circuit between the way a country’s currency is valued and the international trade.
29 Jun 2020 05:35 PM
Dynamic hedging is a foreign exchange risk management strategy that allows businesses and individuals to readapt their hedging positions to evolving market conditions by providing flexible solutions to protect investments from exchange rate risks.
19 Jun 2020 05:01 PM
Management of Currency Exchange Risk is of paramount importance during turbulent times, like this pandemic. The currency fluctuations are very volatile and cannot be predicted as the circumstances are uncertain.