The currency market, commonly referred to as the foreign exchange market, is a marketplace where various individuals from across the world buy and sell various currencies. In the conduct of international trade, this market is extremely important. The currency market benefits businesses and people by allowing them to buy and sell products and services in foreign currencies and by facilitating a constant flow of capital. The key players in the currency markets, including big multinational banks, corporations, governments, and retail traders, work around-the-clock. Members come to the currency market with various goals in mind, and together they increase the market's efficiency and liquidity. These markets, in large part, are what power the vibrant world economies.
It is interesting
that the currency market is
a network
of international markets rather than
a single market exchange. Japanese markets are followed by those in
Hong Kong, Singapore, India, Bahrain, Europe, the
United
Kingdom, the United States, Canada, and Australia, all of which operate according to their respective time
zones.
Cross-border
trade, investment, and financial activities are
significantly facilitated by the
foreign exchange markets. These
marketplaces enable companies conducting
foreign exchange transactions to
change their existing currency or deposit into the desired currency or
deposit. Foreign exchange dealers handle the majority of transactions; on an average day, they deal with nearly a trillion dollars' worth of exchanges involving
only
U.S. dollars. With growing
worldwide economic activity, trade, and
investment
as well as technology that enables real-time information
transmission and trading, the significance of
foreign exchange markets has
expanded.
A number of factors may influence foreign exchange rates, including the following cited by Rose (1994):
• Balance of Payments Position: The foreign currency rate of a nation with a trade imbalance
typically experiences
downward pressure.
• Future Currency Value Speculation: When
they spot lucrative possibilities, speculators will purchase
or
sell currencies.
• Domestic Political and Economic Circumstances: Foreign exchange rates often suffer from deteriorating economic conditions and inflation.
• Intervention by the Central Bank: To alter the value of their own currency, central banks may buy or sell different currencies.