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Revision as of 19:05, 11 July 2005
The foreign exchange market (also referred to as forex or fx) is the market of currencies. Trade takes place when one country's currency (such as the Swiss Franc) is exchanged for the currency of another country (say the Japanese Yen). The market exists to facility the exchange of money around the globe for business and travel purposes, though speculation has become increasingly popular over the years.
Foreign Exchange transactions take place 24 hours per day, around the world through a combination of inter-bank and futures andoptions markets, though the inter-bank market far surpases the others in volume. In fact foreign exchange is the largest of the financial markets, dwarfing all others.
The Forex market is called an 'Inter-bank' market due to the fact that historically it has been dominated by banks, including central banks, commercial banks, and investment banks. However, the percentage of other market participants is rapidly growing, and now includes large multinational corporations, global money managers, registered dealers, international money brokers, futures and options traders, and private speculators. The total daily value of foreign exchange transactions currently stands at around $1.9 Trillion.
The forex market trades in currency pairs. These pairs use a standardized quote structure of Base/Quote with the above mentioned abbreviations in an XXX/YYY format. The pair can be thought of in terms of how much of the Quote currency it takes to make one unit of the Base currency.
Putting this together, EUR/USD is the number of U.S. Dollars it takes to equate to 1 Euro. This is the exchange rate.
It should be noted that a cross-rate or cross currency pair (often just called a cross) is the term used in common market parlance for a currency pair which does not include the USD. An example would be EUR/GBP.
In some trading circles you may hear the term 'Cable' referred to when talking about the GBP/USD. This refers to the transatlantic cable which when laid opened up a whole new area of currency specualtion.
Currency market quotes are displayed in a standard bid/offer set-up. Among the major currency pairs (pairs which include two of the major currencies as listed above), most are quoted to 4 decimal places with a pip equal to 1/10,000 of a point. Where the Japanese Yen is included as the Quote currency, the standard is 2 decimal places, with a pip being 1/10 of a point.
With increased volume in forex trading, the quotes have actually been extended an additional decimal point, at least in the major currency pairs. This has created what are referred to as pippettes, fractions of a pip.
Currency Exchange Rate Influences
The rate of exchange between one country's currency and those of other countries both impacts a given economy and is impacted by it, and similarly ties in with interest rates. A currency will tend to be stronger when the economy is strong in comparisson to others and weaker when the economy is comparatively less strong. At the same time, exchange rates directly impact trade and investment.
Trade is often spoken about as the primary factor in foreign exchange. Also important are:
There is really only one major currency index which is actively trade. That is the US Dollar Index (USDX), which is traded via the futures and futures options market on the New York Board of Trade (NYBOT).
Related T2W Resources
live charts for usdx are available at www.netdania.com