Foreign Currency Markets

Foreign exchange (forex) is the largest and most liquid financial market in the world. The cash amounts alone that flow through this market on a daily basis are staggering. The equivalent of trillions of U.S. dollars enter and exit this market every trading day. Individual trades consist of huge amounts of foreign currencies. Trading $500 million to over $1 billion in a single trade is relatively common for the larger players. The unique nature of the forex market comes from its fundamental structure: an international network of over-the-counter dealers. These dealers constantly quote and requote exchange rates, which are the pricing mechanism that makes forex work.

About 2,000 dealers make up the global forex market according to the Bank for International Settlements. This seeming simplicity conceals a staggering network of complexity. Every country that participates in the forex market has its own rules and regulations. Every forex participant making trades is really trading physical currency deposits held in banks located in foreign countries. The regulatory systems within these countries controlling their banking systems must interface with one another in order to complete transactions within the forex market. Trading forex is really nothing more than trading claims on currency deposits.

The changes in relative values of different currencies are reflected in changing exchange rates. An exchange rate is the price of one currency in terms of another. The rate represents the number of units of one currency that must be exchanged for one unit of another currency. This rate is expressed in the form of a currency pair. A currency pair is made up of the two symbols of another currency. An example is the AUD/JPY, which represents selling the Australian dollar on the left side and buying the Japanese yen on the right side. In this case, as of October 19, 2011, one Australian dollar could be exchanged for ¥78.50 in return.

Market participants range from central banks to humble tourists trying to get some spending money. Central banks are the heavyweights in the forex market. They have the ability to print more units of their currencies. They can influence the forex market by printing more of their own currency which enables them to purchase other foreign currencies. The Bank of Japan is well-known for doing this. Since the March 2011 earthquake the Japanese central bank has sent the yen to new lows against the major currencies in an effort to keep the currency in favor of domestic exporters.

The complexity of the forex market arises out of the nature of its participants. On any given day, speculators are attempting to make profits while international businesses are trying to convert profits from one currency to another. Central banks may be intervening while currencies zoom up or down depending on economic or geopolitical events.

The forex market is treacherous for the unprepared. New traders need as much information as they can. Lucror FX can help them get started on their journey. A steep learning curve can be successfully navigated with the right assistance and advice. Contact Lucror FX at www.lucrorfx.com for more information today.

 

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