It is after the breakdown of Bretton Woods system in 1971 and most of the economies shifting to managed exchange rate regime, when the forex market started operating globally in a major way. It is after the breakdown of Bretton Woods system in 1971 and most of the economies shifting to managed exchange rate regime, when the forex market started operating globally in a major way. The decade of 1990's witnessed major policy changes thereby re-orienting markets which reflected a rapid expansion of forex market in terms of:
|Foreign Exchange swaps||- $1765 billion|
|Spot Transactions||- $1490 billion|
|Outright Forwards||- $475 billion|
|Options and other products||- $207 billion|
|Currency swaps||- $43 billion|
The Forex market is different from stock market in the sense that the former follows a hierarchical order in its level of access. At the apex is the Inter-Bank market, consisting of commercial banks and security dealers. They account for 53 % of all transactions.
Following Inter-Banks are the Smaller Banks, then the Multi National Corporations, large Hedge Funds and some Retail Forex market makers. Hence, the main participants are:
- Forex fixing
- Central banks
- Retail forex traders
- Commercial companies
- Hedge funds as speculator
- Non-banking forex companies
- Investment management firms
- Money transfer/Remittance companies
The changes in the forex market are a cumulative effect of economic factors, political conditions and market psychology.
Economic factors: The economic policies, balance of trade as well as inflation and growth rates of an economy influence the exchange rate of a currency. An economy's productivity also influences its exchange rates positively.
Political conditions: Political stability is one of the key factors operating behind forex market fluctuations. Also events in one country may affect the exchange rate of neighboring country's currency.
Market psychology: Forex markets are highly responsive to expectations and market perceptions. The participants often rely their decisions on long term trends of economic indicators.
The most traded currencies in the forex market are:
1. U.S Dollar (USD)
2. British Pound Sterling (GBP)
3. Euro (EUR)
4. Canadian Dollar (CAN)
5. Australian Dollar (AUD)
6. Swiss Franc (CHF)
7. New Zealand dollar (NZD)
8. Japanese Yen (JPY)
As measured by the volumes of trade, USD-GBP and USD-EUR are the most popular currency pairs. However, this does not imply that they are the most profitable currency pairs or best investment options. It is always advisable that any customer should analyze past data for the currency pair with greatest pip movement and least volatility before making investment decisions.