FOREX-Dollar rises from 2009 low on recovery concerns

The dollar rebounded on Tuesday from its lowest level this year against a basket of currencies as a drop in U.S. consumer confidence fueled worries about the economy, enhancing the greenback's safe-haven appeal.

The weaker-than-expected U.S. data added to pessimism already in the financial markets sparked by disappointing quarterly results from a handful of major companies such as Office Depot Inc (ODP.N: Quote, Profile, Research).

That weighed heavily on stock and oil prices and dragged down the Australian dollar from its highest level against the U.S. currency since last September. The yen rallied across the board as investors dumped riskier assets.

"Consumers are feeling no love in this recovery," said Boris Schlossberg, director of currency research at GFT Forex in New York. "All this suggests is that the critical assumption by the recovery bulls that consumption will come back as the recovery takes hold is faulty."

FXCM

FXCM Holdings LLC is the holding company of one of the world's largest "forex dealer members" (or financial services firms specializing in retail forex), supplying online trading services for retail and institutional speculators in the foreign exchange market. Its subsidiaries include Forex Capital Markets LLC, Forex Capital Markets LTD, FXCM Asia LTD, FXCM Canada LTD, FXCM Australia LTD, and Forex Trading LLC. The company has over 125,000 live accounts trading via its Trading Station software and over 400 institutional customers from more than 200 countries. Over 600 employees, based in offices in New York City, London, Tokyo, Plano, San Francisco, Paris, Sydney and Hong Kong provide 24-hour, multi-lingual sales, administrative, and technical support 7 days a week. Trading hours are from Sunday between 5:00 and 5:15pm ET through Friday 4:00pm ET.

Overnight indexed swap

An overnight indexed swap (OIS) is an interest rate swap where the periodic floating rate of the swap is equal to the geometric average of an overnight index (i.e., a published interest rate) over every day of the payment period. The index is typically an interest rate considered less risky than the corresponding interbank rate (LIBOR).

In the United States, OIS rates are calculated by reference to daily Fed funds rates.

OIS rates (or, in particular, the difference or "spread" between OIS rates and LIBOR rates) are an important measure of risk and liquidity in the money market, considered by many, including former US Federal Reserve chairman Alan Greenspan, to be a strong indicator for the relative stress in the money markets. A higher spread is typically interpreted as indication of a decreased willingness to lend by major banks, while a lower spread indicates higher liquidity in the market. As such, the spread can be viewed as indication of banks' perception of the creditworthiness of other financial institutions and the general availability of funds for lending purposes.

The LIBOR-OIS spread has historically hovered around 10 basis points. However, in the midst of the financial crisis of 2007–2009, the spread spiked to an all-time high of 364 basis points in October 2008, indicating a severe credit crunch. Since that time the spread has declined erratically but substantially, dropping below 1.00% in mid-January 2009 for the first time since September 2008 but remaining well above historical averages

Forex swap

By far and away the most common use of FX swaps is for institutions to fund their foreign exchange balances.

Once a foreign exchange transaction settles, the holder is left with a positive (or long) position in one currency, and a negative (or short) position in another. In order to collect or pay any overnight interest due on these foreign balances, at the end of every day institutions will close out any foreign balances and re-institute them for the following day. To do this they typically use tom-next swaps, buying (selling) a foreign amount settling tomorrow, and selling (buying) it back settling the day after.

The interest collected or paid every night is referred to as the cost of carry. As currency traders know roughly how much holding a currency position will make or cost on a daily basis, specific trades are put on based on this; these are referred to as carry trades.

Fixed exchange rate regime vs. Capital control

Usual belief that the fixed exchange rate regime brings with stability is a misconception. Almost all speculative attacks are targeted on currencies with fixed exchange rate regime, and in fact, the stability of the economy system is mainly due to Capital control. The fixed exchange rate regime should be viewed as a tool to ensure the capital mobility control. For instance, China allows freely exchange for current account transactions since December 1, 1996. In more than 40 categories of capital account, there are about 20 of them are convertible. These convertible accounts are mainly FDI related. Because of the capital control, even renminbi is not under the managed floating exchange rate regime (but a clean floating), it will be somewhat useless for foreigners to get renminbi. So it is not about the exchange rate regime that matters for the dynamics of balance of payment, but the capital control.

Fixed exchange rate

A fixed exchange rate, sometimes called a pegged exchange rate, is a type of exchange rate regime wherein a currency's value is matched to the value of another single currency or to a basket of other currencies, or to another measure of value, such as gold.

A fixed exchange rate is usually used to stabilize the value of a currency, vis-a-vis the currency it is pegged to. This facilitates trade and investments between the two countries, and is especially useful for small economies where external trade forms a large part of their GDP.

It is also used as a means to control inflation. However, as the reference value rises and falls, so does the currency pegged to it. In addition, a fixed exchange rate prevents a government from using domestic monetary policy in order to achieve macroeconomic stability.

Foreign exchange market

The foreign exchange market (currency, forex, or FX) is where currency trading takes place. It is where banks and other official institutions facilitate the buying and selling of foreign currencies.FX transactions typically involve one party purchasing a quantity of one currency in exchange for paying a quantity of another. The foreign exchange market that we see today started evolving during the 1970s when worldover countries gradually switched to floating exchange rate from their erstwhile exchange rate regime, which remained fixed as per the Bretton Woods system until 1971.

Presently, the FX market is one of the largest and most liquid financial markets in the world, and includes trading between large banks, central banks, currency speculators, corporations, governments, and other financial institutions. The average daily volume in the global foreign exchange and related markets is continuously growing. Traditional daily turnover was reported to be over US$3.2 trillion in April 2007 by the Bank for International Settlements. Since then, the market has continued to grow. According to Euromoney's annual FX Poll, volumes grew a further 41% between 2007 and 2008.

The purpose of FX market is to facilitate trade and investment. The need for a foreign exchange market arises because of the presence of multifarious international currencies such as the US Dollars, Euro, Japanese yen, Pound Sterling, etc..., and the need for trading in such currencies.

Retail forex platform

Retail forex trading is a segment of the vast foreign exchange market. It has been speculated that it represents 2 percent of the whole forex market which amounts to $50-60 billion in daily trading turnover. Due to the increasing tendency in the past years of the gradual shift from traditional intrabank 'paper' trading to the more advanced and accurate electronic trading, there has been spur in software development in this field. This change provided different types of trading platforms and tools intended for the use by banks, portfolio managers, retail brokers and retail traders.

One of the most important tools required to perform a forex transaction is the trading platform providing retail traders and brokers with accurate currency quotes.

Capital account

The capital account records all transactions between a domestic and foreign resident that involves a change of ownership of an asset. It is the net result of public and private international investment flowing in and out of a country. This includes foreign direct investment, portfolio investment (such as changes in holdings of stocks and bonds) and other investments (such as changes in holdings in loans, bank accounts, and currencies).

From a domestic point of view, a foreign investor acquiring a domestic asset is considered a capital inflow, while a domestic resident acquiring a foreign asset is considered a capital outflow.

Along with transactions pertaining to non-financial and non-produced assets, the capital account may also include debt forgiveness, the transfer of goods and financial assets by migrants leaving or entering a country, the transfer of ownership on fixed assets, the transfer of funds received to the sale or acquisition of fixed assets, gift and inheritance taxes, death levies, patents, copyrights, royalties, and uninsured damage to fixed assets.

Countries can impose capital controls to control the flows into and out of their capital accounts. Countries without capital controls are said to have full Capital Account Convertibility.

Foreign exchange reserves

Foreign exchange reserves (also called Forex reserves) in a strict sense are only the foreign currency deposits and bonds held by central banks and monetary authorities. However, the term in popular usage commonly includes foreign exchange and gold, SDRs and IMF reserve positions. This broader figure is more readily available, but it is more accurately termed official international reserves or international reserves. These are assets of the central bank held in different reserve currencies, mostly the US dollar, and to a lesser extent the euro, the UK pound, and the Japanese yen, and used to back its liabilities, e.g. the local currency issued, and the various bank reserves deposited with the central bank, by the government or financial institutions.

Forex Bank

Forex AB is a Swedish financial services company. The company was started in 1927 as a currency exchange service for travellers, at the Central Station in Stockholm. The owner of Gyllenspet's Barber Shop, according to the legend, discovered that most of his customers were tourists in need of currency for their trips. The owner began keeping the major currencies on hand.

The company was subsequently acquired by Statens Järnvägar (SJ), the Swedish State Railways, which expanded the operations until it was sold off to one of the managers, Rolf Friberg, in 1965. The company was the only one apart from the banks that was licensed to conduct currency exchange in Sweden.

The company, which is still wholly owned by the Friberg family, has expanded into Denmark, Finland, Norway and Iceland and has over 60 shops, usually located at train stations or airports. The decrease in the business brought on by introduction of the euro has made the company look for alternative sources of revenue, like applying for a banking licence and attempting to move into more regular transaction services, earlier handled by Svensk Kassaservice, a subsidiary of the state owned Swedish postal company, Posten.

Since 2003 Forex is a licensed bank.

Non-bank Foreign Exchange Companies

Non-bank foreign exchange companies offer currency exchange and international payments to private individuals and companies. These are also known as foreign exchange brokers but are distinct in that they do not offer speculative trading but currency exchange with payments. I.e., there is usually a physical delivery of currency to a bank account.

It is estimated that in the UK, 14% of currency transfers/payments are made via Foreign Exchange Companies. These companies' selling point is usually that they will offer better exchange rates or cheaper payments than the customer's bank. These companies differ from Money Transfer/Remittance Companies in that they generally offer higher-value services.

Retail foreign exchange brokers

There are two types of retail brokers offering the opportunity for speculative trading: retail foreign exchange brokers and market makers. Retail traders (individuals) are a small fraction of this market and may only participate indirectly through brokers or banks. Retail brokers, while largely controlled and regulated by the CFTC and NFA might be subject to foreign exchange scams. At present, the NFA and CFTC are imposing stricter requirements, particularly in relation to the amount of Net Capitalization required of its members. As a result many of the smaller, and perhaps questionable brokers are now gone. It is not widely understood that retail brokers and market makers typically trade against their clients and frequently take the other side of their trades. This can often create a potential conflict of interest and give rise to some of the unpleasant experiences some traders have had. A move toward NDD (No Dealing Desk) and STP (Straight Through Processing) has helped to resolve some of these concerns and restore trader confidence, but caution is still advised in ensuring that all is as it is presented.

Foreign exchange market

The foreign exchange market (currency, forex, or FX) is where currency trading takes place. It is where banks and other official institutions facilitate the buying and selling of foreign currencies. FX transactions typically involve one party purchasing a quantity of one currency in exchange for paying a quantity of another. The foreign exchange market that we see today started evolving during the 1970s when worldover countries gradually switched to floating exchange rate from their erstwhile exchange rate regime, which remained fixed as per the Bretton Woods system until 1971.

Presently, the FX market is one of the largest and most liquid financial markets in the world, and includes trading between large banks, central banks, currency speculators, corporations, governments, and other financial institutions. The average daily volume in the global foreign exchange and related markets is continuously growing. Traditional daily turnover was reported to be over US$3.2 trillion in April 2007 by the Bank for International Settlements. Since then, the market has continued to grow. According to Euromoney's annual FX Poll, volumes grew a further 41% between 2007 and 2008.

The purpose of FX market is to facilitate trade and investment. The need for a foreign exchange market arises because of the presence of multifarious international currencies such as the US Dollars, Euro, Japanese yen, Pound Sterling, etc..., and the need for trading in such currencies.