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FX Initiative Blog

Actionable insights on foreign exchange risk management from FX Initiative.

Summarizing FX Supply & Demand

Summarizing FX Supply & Demand (Video): Explore how supply and demand factors influence foreign exchange (FX) rate fluctuations. This video is a preview of FX Initiative’s FX Market Overview course as part of Learning Objective #4.

 

To learn more, start your FX risk management training today, which provides 24/7 365 access to our complete suite of foreign exchange (FX) continuing professional education (CPE), examples & events at FXCPE.com.

 

Summarizing FX Supply & Demand

Summarizing FX Supply & Demand (Video): Explore how supply and demand factors influence foreign exchange (FX) rate fluctuations. This video is a preview of FX Initiative’s FX Market Overview course as part of Learning Objective #4.

 

To learn more, start your FX risk management training today, which provides 24/7 365 access to our complete suite of foreign exchange (FX) continuing professional education (CPE), examples & events at FXCPE.com.

 

September 2019 Newsletter

Explore our September 2019 newsletter and discover the latest blog posts and insights from FX Initiative. We help finance, accounting, treasury, and sales professionals stay up to date with new training content, CPE webinars, and helpful tips & resources.

Get started with our foreign exchange risk management training, which provides 24/7 365 access to our complete suite of foreign exchange (FX) continuing professional education (CPE), examples and events at FXCPE.com. Start Training >

 

Summarizing FX Supply & Demand (Video)

Summarizing FX Supply & Demand (Video): Explore how supply and demand factors influence foreign exchange (FX) rate fluctuations. This video is a preview of FX Initiative’s FX Market Overview course as part of Learning Objective #4.

 

To learn more, start your FX risk management training today, which provides 24/7 365 access to our complete suite of foreign exchange (FX) continuing professional education (CPE), examples & events at FXCPE.com.

 

Time Zones & FX Trading Trends (Video)

Time Zones & FX Trading Trends (Video): Discover how time zones impact global foreign exchange (FX) market trading, volume, and liquidity. This video is a preview of FX Initiative’s FX Market Overview course as part of Learning Objective #2.

 

To learn more, start your FX risk management training today, which provides 24/7 365 access to our complete suite of foreign exchange (FX) continuing professional education (CPE), examples & events at FXCPE.com.

 

Explore How To Forecast FX Rates

Want to explore how to forecast FX rates? FX Initiative’s FX Market Overview course provides proven best practices and real world examples to help you forecast future exchange rate movements in the $5+ trillion daily FX market, the largest and most liquid market in the world. Get started with our foreign exchange risk management training, which provides 24/7 365 access to our complete suite of foreign exchange (FX) continuing professional education (CPE), examples and events at FXCPE.com. Start Training >

 

 

Commemorating Forty-One (41) Years of Fiat Currency

FX Initiative

This week marks 41 years since the definition of the U.S. dollar was officially changed through Public Law 94-564 on October 19, 1976. The result was a shift in U.S. monetary policy where the gold standard, which pegged all currencies to the U.S. dollar (USD) and fixed value in terms of gold, was replaced by our current system of freely floating fiat currencies, where currency no longer holds intrinsic value and is established as money by government regulation or law. This was the most notable event during the Nixon Shock, which was a series of economic measures undertaken by United States President Richard Nixon beginning in 1971, and shaped the nature of the foreign exchange market as it exists today.

FX Initiative

Source: http://uscode.house.gov/statutes/pl/94/564.pdf

The free floating system of fiat currencies is best illustrated by the U.S. dollar Index (DXY) that was introduced in March of 1973. The DXY is a measure of the value of the United States dollar (USD) relative to a basket of foreign currencies, which include the euro (EUR), Japanese yen (JPY), Pound Sterling (GBP), Canadian dollar (CAD), Swedish Krona (SEK) and Swiss franc (CHF). At its start, the value of the U.S. Dollar Index was 100.000, and it has since traded as high as 164.7200 in February 1985, and as low as 70.698 on March 16, 2008. The DXY goes up when the U.S. dollar gains value when compared to other currencies, and goes down when the U.S. dollar loses value. The following graph shows the volatility in the value of the U.S. dollar over the last 50 years in relation to various political, economic and other major global events.

FX Initiative

Source: US Dollar Index from Stooq.com

Free floating exchange rates are determined by the balance between supply and demand factors that influence a particular currency, and the intersection point where supply meets demand establishes what is known as the price equilibrium or exchange rate. The graph below of supply and demand shows that when there is an increase in demand and a corresponding shift of the demand curve to the right, a new intersection point where supply meets demand is established, and a new price equilibrium or exchange rate is set. In this case, as demand increases, the value or price of the currency also increases from Exchange Rate 1 to Exchange Rate 2. These fluctuations in currency values underscore the concept of exchange rate risk, or currency risk, which arises from the change in price of one currency against another.

FX Initiative

Source: FX Initiative FX Market Overview Course

Supply and demand with respect to foreign currency valuations is a simple idea in theory. If at a particular exchange rate, demand exceeds supply, the price will rise, and if supply exceeds demand, the price will fall. Supply is influenced by a central bank’s monetary authority through monetary policy, and depending on the specific circumstances and economic goals of a country or region, a monetary authority will influence the money supply through interest rates and other market mechanisms. Demand, on the other hand, comes from a multitude of market forces including, but not limited to, (1) economic business cycles and economic data releases (2) international investment patterns and foreign direct investment (3) the balance of payments as it relates to tradable goods and services (4) government fiscal, monetary, or other policies and political developments and (5) speculation based on any or all of these factors.

FX Initiative

Source: FX Initiative FX Market Overview Course

Over the last 40 years, governments have played a significant role in defining and driving the value of free floating fiat currencies. Since the financial crisis of 2007–2008, exchange rates have been impacted by several major foreign exchange interventions as follows:

In commemoration of the week that changed the foreign exchange market as we know it, we can look at free floating exchange rates through the lens of history and see how the events of the 1970’s are still impacting the value of more than 180 currencies recognized as legal tender in circulation throughout the world.

To learn more about the foreign exchange market and how to manage currency risk, explore FX Initiative’s educational videos, interactive examples, and webinar events. Our currency risk management training illustrates best practices from leading organizations such as Apple to help you efficiently and effectively mitigate foreign exchange risk for your international business. Learn how to assess and optimize your firm's foreign exchange risk profile by taking the FX Initiative today!

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Cheers,

The FX Initiative Team
support@fxinitiative.com