# currency

Currency (usually plural , used infrequently foreign exchange ) is a term used in economics and finance to be generally on foreign currency denominated foreign cash (except varieties ). Especially in the banking sector (always used in the plural here), this includes receivables denominated in a foreign currency, payable abroad , mostly in the form of balances with foreign correspondent banks , checks and bills of exchange . The term is interpreted most narrowly in foreign exchange trading by credit institutions , because here the term foreign exchange is reduced to bank balances held with foreign credit institutions .

## etymology

Devise (n) was first encountered as a technical term in finance towards the middle of the 19th century, initially as a term for short-term bills of exchange with an external place of payment , especially foreign bills of exchange payable in a foreign currency. Its origin has not been established with certainty; It is evidently an etymological duplicate of the word devise , which was borrowed from French into German in the 16th century and which actually designates a coat of arms in the technical language of heraldry or the field of coat of arms divided for it (cf. French diviser , "divide") and today in a more general sense of "motto, motto, slogan" is used. The renewed expansion of the meaning of "bill of exchange" is more difficult to interpret semasiologically . According to the Larousse universel of 1922, banks used to sort the foreign bills of exchange in their portfolios according to payment locations : "  on place les effets par devises: ceux sur Londres, sur Bruxelles, sur Rome, etc.  " The use of devise corresponds to that of "payout" in German stock exchange jargon (“Payout London,” antiquated today), but the word may also be understood in the sense of “ password ,” but perhaps also in the older sense of “division.” However, it seems certain that this new word usage first came up in Germany and was later borrowed back into French . As a designation for change, motto is at least first booked in August Schiebes commercial concise dictionary from 1833 (“a celebratory and ill-used expression, which is often used in cursory reports, where it means something like change; e.g., this motto (es Be it Paris paper or something else) is wanted. '”) and is frequently attested in the German literature of the following decades, in France, however, conspicuously only in German-French dictionaries. The peculiar choice of words in Larousse also speaks for an origin on the right bank of the Rhine: the fact that foreign currencies are placed here “sur” London etc. suggests a transfer from German - bills of exchange are drawn “to” a bank location, for example “to London”.

Until the First World War, the term was almost exclusively limited to tradable short-term foreign bills of exchange , which Arthur Nussbaum calls “foreign exchange in the narrowest sense” in 1925. The current meaning, which also and in particular includes foreign bank deposits and other values ​​quoted in foreign currencies, was only solidifying During the Weimar Republic and National Socialism , along with the growing importance of state foreign exchange management in foreign and economic policy.

In this broader meaning or simply in the sense of "foreign currency", the term is also used today in French ( devises ) and all other Romance languages ​​(Italian, Portuguese and Spanish divisas , Romanian divize ), as well as in the Slavic languages ​​(Polish dewizy , Russian девиза , Croatian deviza etc.), also in Hungarian ( deviza ) and in Dutch ( deviezen ). In the Scandinavian languages, in other words in Danish, Norwegian and Swedish, the term could not catch on; it came into fashion here in the late 19th and early 20th centuries, but then fell out of use again. In English - the dominant business language today - there is no exact equivalent; Strictly speaking, the common translation foreign exchange or forex for short does not refer to the currency itself, but to trading with it, the currency market .

## Conceptual content and delimitations

Depending on the purpose of the investigation, the currency term is used more broadly or more narrowly. All definitions cover means of payment in foreign currencies that are payable abroad. Means of payment, in turn, are claims rights similar to money in the context of cashless payment transactions ( bills of exchange , checks and money orders such as travelers checks or letters of credit ). Foreign currencies enable immediate (or at least very short-term) cash payments in a foreign currency and thus embody instant purchasing power in a foreign currency (or at least purchasing power in the form of short-term receivables, i.e. with a short self-liquidation period). At credit institutions, the term “foreign exchange” is technically reduced to “sight deposits in foreign currency on the checking accounts of foreign and domestic banks”, sometimes even narrowed to sight deposits in the issuing country of the currency: the foreign currency are held “In addition, short-term time deposits and money market paper are added.

Foreign currencies do not include sorts because they are legal tender as cash. However, they can be converted into foreign currency by depositing into an account in the same local currency. Less liquid debt claims such as bonds in foreign currencies are also not included in the foreign exchange, especially not share values ​​such as stocks .

## convertibility

Free foreign exchange is only possible if the currencies concerned are fully convertible . Then every owner of foreign currency has the right to exchange them for domestic or other foreign currencies at the parity rate, in particular regardless of the intended use. However, if a currency is only convertible to a limited extent, a distinction is made between the following aspects:

• Foreign convertibility: The right to exchange domestic currency for foreign currency is only granted to foreigners or foreign central banks;
• Purpose of use: The right of exchange is restricted with regard to the use, for example capital transactions or investments in domestic companies are prohibited or subject to an authorization requirement;
• Currencies: Exchange rights are limited to certain currencies or amounts.

The limited or complete lack of convertibility hinders the free movement of foreign exchange and capital, in particular the trading of foreign exchange on exchanges or between credit institutions. Full convertibility is an important indicator for so-called “ hard currency countries ”.

## Forex exchanges and price formation

Foreign currencies - limited here to balances with foreign banks - can be traded in standardized quantities. This can be done via foreign exchange exchanges, i.e. state-approved and organized institutions where an officially determined spot rate is set as the middle rate for quoted currencies by an official broker. Up until December 31, 1998, the leading exchange in Germany was Frankfurt am Main, which on every trading day at around 1 p.m. had compensated for any open exchange rate peaks with the help of the Bundesbank in so-called fixing and then determined the official exchange rate. All exchange participants charged the official middle rate, while higher than the average rate margin ( "for bank customers spread ") as a selling rate and a correspondingly underlying margin than bid price was determined. Banks buy foreign currency from their customers at the bid rate and sell them to customers at the ask rate. The official exchange rate was thus the most important reference value for foreign exchange transactions.

Since the closure of the German foreign exchange exchanges due to the introduction of the euro, the so-called “EuroFX”, at which a total of 17 institutes set the mean values ​​of their exchange rates around 1 p.m. and publish them on REUTERS, have often been used as reference values ​​for foreign exchange. Exchanges such as NYSE Euronext use the EuroFX rates when converting foreign currency contracts, credit card companies convert foreign sales on this basis, and end consumers can check their statements with the help of the publication in the daily press. However, on April 1, 2015, EuroFX stopped determining exchange rates.

After a conference call with the central banks of the euro-participating countries, the European Central Bank (ECB) sets exchange rates, so-called reference rates, shortly after 2 p.m. every day. However, due to their greater distance from the market, they are used less for foreign exchange transactions than for statistics, balance sheets of large companies and general guidance.

Most of the foreign exchange volume traded around the world was and is still processed through foreign exchange trading as part of interbank trading . The banks do not use foreign exchange exchanges, but rather conclude bilateral foreign exchange transactions directly with their partner banks (“counterparties”). There is an individual course formation for each individual transaction, which is completely independent of the EuroFX rate on the basis of the current market rates. The EuroFX rate is at best an interim result and reflects the average value of interbank trading at a certain point in time.

## Foreign exchange transactions

The foreign exchange market enables domestic money to be exchanged for foreign currency and vice versa, thereby converting purchasing power from domestic currency to foreign currency . The foreign exchange market is an economic place where the supply of and demand for foreign exchange meet. This is done institutionalized through foreign exchange trading, the object of which is foreign exchange transactions as a trading object. This includes spot and forward exchange transactions as basic forms. Foreign exchange trading at banks ensures that customer transactions are balanced out for foreign exchange surpluses or deficits and for hedging against currency risks that may result from holding open currency positions.

Foreign exchange transactions in which the currencies are exchanged two working days after the time of the transaction are called "foreign exchange spot transactions". On the other hand, a "forward exchange deal" is a foreign exchange deal in which the exchange of currencies is agreed on at a certain future date (1, 3, 6, 12 months or more) and at an exchange rate ( forward rate ) that was agreed upon when the transaction was concluded . Forward exchange transactions are suitable for hedging against exchange rate fluctuations.

There is a difference between the spot exchange rate and the forward exchange rate known as the "swap rate"; this is expressed as a percentage of the spot exchange rate. If the forward rate is above the spot rate, it is called a “ report ” , if it is below it, it is called a “ deport ”. The starting point is the interest rate level in Germany or abroad (for volume quotation ):

${\ displaystyle {\ text {Domestic interest rate}}> {\ text {Foreign interest rate}} = {\ text {Deport}}}$
${\ displaystyle {\ text {Domestic interest rate}} <{\ text {Foreign interest rate}} = {\ text {Report}}}$.

In currency option transactions , the buyer acquires the right to buy or sell a certain amount in a currency at a certain price on a certain day or within a certain period of time. Depending on the content of the deal, a distinction is made between buy and sell options. The business partner of the purchaser of an option is known as the writer . In a foreign exchange futures contract, the acquirer undertakes to buy or sell currencies for a certain amount.

Cash currency is immediately available to the buyer (in practice two working days after purchase). Forward currencies, on the other hand, are only available to the buyer at a later point in time.

## Foreign exchange speculation and arbitrage

As an asset, foreign exchange is also an object of speculation and arbitrage. While speculation tries to take advantage of price differences within a certain period of time , arbitrage is designed to take advantage of price differences at a specific point in time in different places. Foreign exchange speculation and arbitrage are part of the banks' proprietary trading , so they are not customer-driven. Non- banks also take part in foreign exchange speculation and arbitrage to a considerable extent, in that (internationally active) companies in particular do not close out or secure (“hedge”) their foreign exchange income or expenditure on the same day , but hold them in their portfolio without any operational reasons.

Foreign exchange speculation is ultimately the purchase or sale of foreign exchange spot or forward transactions in the expectation that if the opposite transaction is carried out ( closing out ) a profit will arise in the future due to the development of the exchange rate. Foreign exchange speculation therefore requires open foreign currency receivables ("open long position") and / or open foreign currency liabilities ("open short position") that are not hedged by corresponding counterpositions congruently (i.e. with identical maturities and in the same currency).

Currency arbitrage occurs when currency differences are exploited at a particular point in time. Arbitrage therefore requires the simultaneous buying and selling of a currency on two different markets in order to profitably exploit the exchange rate difference between these markets. Due to this point in time, arbitrage is completely risk-free, while speculation is also associated with a risk of loss.

## National and global economic importance

From an economic point of view, foreign exchange holdings arise in a country in particular through permanent surpluses in the trade balance (if other influences are abstracted). A country then exports more than it imports, which means that it receives more foreign currency than it has to spend again through imports. The foreign exchange holdings of a state created in this way are not only an internationally recognized status symbol for the economic power of the state, but are also part of important key figures in the rating of states by rating agencies (see country risk ). These calculate, for example, the key figure for import coverage by comparing the import volume of a country with the foreign currency holdings in a certain period of time and thus can determine how long the import volume can be paid for from existing foreign currency holdings without borrowing. In addition, such foreign exchange holdings also form the means of payment for the repayment and interest payment of national debts with foreign creditors. Temporary current account deficits can be financed with high foreign exchange reserves without hesitation by taking out foreign loans. A state with high foreign exchange reserves therefore has comparatively higher import capabilities and debt servicing potential than states with very little or no foreign exchange reserves. Countries with very little or no foreign exchange holdings can become targets of international speculation. Then the countries concerned must take exchange rate support measures, which foreseeably lead to a consumption of currency reserves through foreign exchange market interventions and in this way cause an international moratorium for a state. This means that foreign exchange holdings are also an essential part of a country's currency reserves.

According to the International Monetary Fund , the foreign exchange reserves held by states amounted to nearly 2 trillion US dollars in 1999 . In 2008 that amount had peaked to \$ 7 trillion, of which about 2½ trillion was accounted for. Dollars to advanced industrialized countries, while 4½ trillion. Dollars were held by emerging economies. In 2009 this global foreign exchange portfolio declined. It is now 6½ trillion. Dollar.

## history

The first forms of foreign exchange and their trade can already be seen in ancient Greece. There were different currencies in the various small states, which made trade between them very difficult. Therefore, private bankers acted as money changers who took care of the exchange business with the various currencies and coins. They also engaged in bonds, pawns and investing activities.

A kind of exchange rate or currency exchange also developed in the Roman Empire . The so-called argentarii (changers, bankers) determined the value of different coins and currencies on their exchange tables and exchanged them for the Roman currency . Many other currencies and coins were adapted to the Roman coin system. This also gave rise to the first forms of checks and bills of exchange . Another advance was made by the Florentine Medici family , who in the course of their busy trading activities set up a nostro book or nostro account in which they listed numerous foreign and domestic currencies and their corresponding values. The gold standard prevailed in the late Middle Ages . The nation states began to amass resources like gold and silver to secure their own currency. This meant that a certain amount of gold was equivalent to a certain amount of money. Since money was worth roughly the same everywhere in the world, a more or less constant exchange rate arose. In 1944, however, the gold system collapsed, and with the Bretton Woods Agreement , the US dollar took on its role, so to speak. This meant that currencies could be exchanged at any time in relation to the US dollar. These in turn could be exchanged for gold at any time. However, this system collapsed in the 1970s due to payment deficits in the USA, as a result of which the exchange rates had to be adjusted several times. Since then the system of free and fluctuating exchange rates has prevailed. In 1982, Mexico triggered the debt crisis with the dissolution of its foreign exchange trading , which showed that foreign exchange and its trading can be greatly influenced by external influences such as politics and the economy.

Wiktionary: Motto  - explanations of meanings, word origins, synonyms, translations

## Individual evidence

1. Motto. In: Duden. duden.de, accessed on April 12, 2017 .
2. Political conflicts affect stocks . In: Börsen-Zeitung . No. 72 . Frankfurt am Main April 12, 2017, p. 1 : "Against the euro, Nippon's currency rose by 0.7%."
3. a b foreign exchange. In: Gabler Wirtschaftslexikon. Retrieved April 12, 2017 .
4. devise In: Claude Augé (Ed.): Larousse universel en 2 volumes: nouveau dictionnaire encyclopédique. Larousse, Paris 1922, volume 1, p. 647, col. 1.
5. ^ Alfred Schirmer: Motto. A word-historical consideration. In: mother tongue. Journal for the maintenance and research of the German language. Born in 1949, No. 1, pp. 66-68; Georg Rabuse : Motto as an expression of business language. In: The Austrian business economist. Volume 11, Vol. 1961, pp. 195-201; Entry foreign currency in: Friedrich Kluge: Etymological dictionary of the German language . Edited by Elmar Seebold. 25th, updated and expanded edition (e-book), Berlin u. a. 2012.
6. Entry motto In: August Schiebe : Commercial dictionary, or brief explanation of the most common words and expressions used in trade, with an indication of the French and English terminology . F. Fleischer, Leipzig 1833, p. 37.
7. Kurt Baldinger's review of Rabuse's article in: Zeitschrift für Romanische Philologie. Volume 79, Issue 3, year 1963, p. 301.
8. Arthur Nussbaum: The money in theory and practice of German and foreign law. Mohr, Tübingen 1925, p. 256.
9. Motto. In: Hans Schulz, Otto Basler, Gerhard Strauss (Eds.): German Foreign Dictionary. 2nd edition, Volume 4 ( Da capo dynasty ). De Gruyter, Berlin and New York 1999, pp. 449-453.
10. currency in the Trésor de la Langue Française informatisé.
11. The Svenska Academies Ordbok marks devis as 'scarce br.' , so "hardly in use." [1]
12. ^ Rolf Caspers: Balance of payments and exchange rates. 2002, p. 35.
13. ^ Rolf Caspers: Balance of payments and exchange rates. 2002, p. 37.
14. Helmut Lipfert: Foreign exchange trading and currency options trading. 1992, p. 17.
15. Gustav Dieck Heuer: International Economic Relations. 2001, p. 234.
16. International Money Fund, Article VIII Article VIII of the IMF in English ; Article VIII in conjunction with Article IV of the Statutes of the International Monetary Fund
17. ^ Welt Online from August 8, 2000, When foreign money becomes commodity
18. EuroFX is the short name for the daily determination of reference rates of the most important international currencies against the euro. It is used in the immediate successor for official exchange rate fixing.
19. the procedure was approved by antitrust law
20. Euro FX. Retrieved March 17, 2015 .
21. ^ Rolf Caspers: Balance of payments and exchange rates. 2002, p. 35 f.
22. ^ Rolf Caspers: Balance of payments and exchange rates. 2002, p. 69.
23. ^ Rolf Caspers: Balance of payments and exchange rates. 2002, p. 114.
24. Currency reserves are the stock of international liquidity of a central bank (i.e. foreign currency stocks, in addition to all other claims in foreign currency, gold stocks and special drawing rights with the IMF), which can be used to finance temporary current account deficits if necessary.
25. ^ Economist. July 18, 2009, p. 90.
26. Banking in antiquity. Retrieved December 10, 2014 .
27. Banking in antiquity. Retrieved December 10, 2014 .
28. ^ Christian Marek, Peter Frei: History of Asia Minor in antiquity . CH Beck, Munich 2010, ISBN 978-3-406-59853-1 , p. 512 ( online ).
29. Remittances, credits and money exchange already existed in ancient Rome. In: Tyrolean daily newspaper. October 24, 2014, accessed March 8, 2020 .
30. ^ RA De Roover : The Rise and Decline of the Medici Bank: 1397-1494. Beard Books, 1999, ISBN 1-893122-32-8 , pp. 130-136.
31. ^ RA De Roover: The Medici Bank: its organization, management, operations and decline. New York Univ. Press, 1948.