The foreign exchange market is
a global decentralized market for the trading of currencies. The main
participants in this market are the larger international banks.
Financial centers around the world function as anchors of trading
between a wide range of different types of buyers and sellers around the
clock, with the exception of weekends. The foreign exchange market
determines the relative values of different currencies.
The
foreign exchange market works through financial institutions, and it
operates on several levels. Behind the scenes banks turn to a smaller
number of financial firms known as “dealers,” who are actively involved
in large quantities of foreign exchange trading. Most foreign exchange
dealers are banks, so this behind-the-scenes market is sometimes called
the “interbank market”, although a few insurance companies and other
kinds of financial firms are involved. Trades between foreign exchange
dealers can be very large, involving hundreds of millions of dollars.
Because of the sovereignty issue when involving two currencies, Forex
has little (if any) supervisory entity regulating its actions.
The
foreign exchange market assists international trade and investment by
enabling currency conversion. For example, it permits a business in the
United States to import goods from the European Union member states,
especially Euro zone members, and pay Euros, even though its income is
in United States dollars. It also supports direct speculation in the
value of currencies, and the carry trade, speculation based on the
interest rate differential between two currencies.
