Due to commercial transactions, investment purposes and speculation needs, the people need foreign currencies. Hence, the individuals and the entities need markets in which the exchange of different currencies is done. Foreign exchange markets are helping these individuals and entities to exchange their national currency with a different currency or vice versa with a rate called exchange rate. The foreign exchange market exists wherever one currency is traded for another. It is by far the largest financial market in the world and it includes trading between large banks, central banks, currency speculators, multinational corporations, governments, and other financial markets and institutions. The average daily trade in the global forex and related markets currently is over US$ 3.2 trillion as of 2007.
But especially for international transactions, the foreign currencies and the exchange of these currencies become vital because in each country, usually the national currencies are being used. For example, in Unites States USD, and in England UK Pound is being used. It is understood from the following table that exchange between different currencies has become more important in the past three years. However, the transactions are not evenly distributed among different currency types. As the largest and strongest economy in the world, US have been keeping the validity and the superiority of its currency unit for a long time. However, the importance of Euro which is the common currency of European Union is also very important due to its strength and reputation. These currencies and their part in the world economy can be obviously seen in the following table.
Foreign Currency Transactions
(Source: BIS)
Because two currencies are involved in each transaction, the sum of the percentage shares of individual currencies totals 200% instead of 100%. It is clearly seen that US Dollar has had the majority in the world foreign exchange market in the given period of time. It is also not so difficult to predict that it was the superior currency before 1992. The dependence to US Dollar has increased from 82% to 90% from 1992 to 2001. However, after this date, the transactions on the other currencies have increased since 2001.
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