By: Dr. Mike Campbell

Back in the good old days, all international trading was carried out in gold. This meant that a trade in any currency could be converted into gold bullion and all currencies were of a fixed worth against each other. Of course, as global trading volumes grew, the system was bound to fail as nations were forced to devalue their currencies for a raft of different reasons, and the supply of gold could not keep pace with demand. The system transitioned to a “gold standard” where a single currency (the US Dollar) could be redeemed for gold, but this mechanism too, could not stand the test of time.

Today (with some notable exceptions), currencies are free to float in value against each other and money can be made by anticipating if a currency is appreciating or depreciating in value. A report that was three years in the making, has just been issued by the Bank for International Settlement. It has determined that approximately $4 trillion Dollars are traded on the world’s foreign exchanges every day. This means that the financial equivalent of the world’s economic output churns through the system every two weeks.

The majority of Forex trading is done through London (37%) with New York handling about half of this volume. The US Dollar is the world’s most heavily traded currency, accounting for 85% of all trades (this is down from 90% in 2001 due to the rise in importance of the Euro). The Euro/Dollar has become the dominant currency pair and is responsible for almost a third of all transactions (28%).

With the sheer scale of the global Forex market, it is easy to understand how a single nation, say Japan, will have problems in maintaining the value of its currency within a desirable band in the free marketplace.