Why is Currency traded?

Why is Currency traded?

Foreign exchange market is where the currency is traded. When trade in goods and services were limited as in olden days, the system of the transaction was through barter. Barter was a system where the transaction was carried out by exchange of goods. But with the expansion of trade, this form of transaction became quite cumbersome. An intermediate between the goods traded was invented. Formerly this was in the form of coins made of metals which had intrinsic value such as gold, silver, and copper. The use of coins to buy and sell goods became convenient. The problem was when the value of goods sold or bought was high. It required that much more coins which were just too cumbersome posing a practical problem. Moreover, trade further expanded. Something easier to handle had to be invented. That was how bank notes made its appearance to substitute coins. Initially, the banknotes were pegged to valuable metals such as the gold standard. But this was later de-linked. Now the value of banknotes comes from the value decreed by governments. These banknotes are issued by banks that are controlled by national governments.

So, why is currency traded and what was the need? Every country came up with their own currency. International trade required transactions to be made in different currencies. Central banks, as well as governments, purchased currencies of other countries in order to facilitate the growing international trade in goods and services. Very soon trading in currency increased steadily. The Forex trading became a distinct economic activity. The exchange rate of currency was determined by the market demand and supply. More currency traders, money managers, and financial institutions began to be entering the market.

Today the foreign exchange market transacts trade in currency worth in Trillions of dollars. It has emerged as a major global economic activity. There are e-books and other learning tools that not only explain how the market operates but also take you step by step to actual investments. Some of these are Forex Trading Explained, Tax Lien Investing, Forex Trading Made EZ, The Forex Video Course, Instant Forex Profit, The Magical Forex Trading, Professional Forex Training, Forex Assassin, The Forex Strategy Workbook and Auto Cash System.

Speculative investment has become the overwhelming type of investment in the forex market. Environmental as well as political and economic factors easily impact on the currency exchange rate. Even rumors could induce a change in the currency rate.

In India, Currency is mostly traded on NSE exchange in four currency pairs.

  1. USDINR – US Dollar / INR
  2.  EURINR – Euro/INR
  3. GBPINR – Great Britain Pound/INR
  4. JPYINR – YEN/INR

Most liquid currency to trade in India is USDINR pair. I hope you are now clear that Why is Currency traded? More on Currency trading in an upcoming post.

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