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This forex basics section covers the impressive size of the forex market, who participates and the role of the US Dollar.
The international currency market or foreign exchange market makes up the biggest single capital market on the planet. On average, trading in the forex market amounts to a total dollar value of over $3 trillion in daily turnover.
The huge market for the world’s currencies dwarfs other markets. For example, the forex market is estimated to be ten times the size of the world debt market and fifty times the size of the global equity market.
The forex market not only is the largest market in the world, but is also the most liquid, with thousands, if not millions, of participants worldwide. In addition, the forex market is open 24 hours a day, five days a week.
Participants in the Forex Market
A significant amount of trading activity on the forex market consists of currency transactions made between:
- Large Commercial Banks
- Central banks and Governments
- Multi-national Corporations
- Hedge and Pension Funds
- Individuals: High Net Worth and Retail Speculators
While the majority of transactions on the forex market consist of transactions among large banks and commercial corporate hedgers, central banks also intervene in the market from time to time to stabilize their country’s currency or adjust its value.
Also, forex brokers play an important role, usually acting as intermediaries between Interbank counterparties. Online retail forex brokers also provide a dealing interface between retail forex traders and the Interbank market.
The Bretton Woods System
From a historical perspective, after two world wars, many of the world’s nations were forced to take their currencies off of the gold standard to print money to finance their side of the conflicts.
The Dollar, which was still convertible to gold, then became the benchmark to which all other major currencies were pegged at the Bretton Woods conference in 1944.
Although this system of fixed exchange rates worked for many years, the Dollar was eventually unilaterally taken off the gold standard by then U.S. President Richard Nixon in 1971 which lead to its breakdown. The major currencies of the world have largely floated against one another since then.
The Influence of the U.S. Dollar
Despite being removed from the Gold Standard, the U.S. Dollar or USD has remained the world’s most traded currency, with it being the base or countercurrency in over 85% of all daily forex transactions. Also, major commodities like oil and gold traditionally trade in Dollars.
Furthermore, the U.S. Dollar has remained resilient to enormous budget deficits, increasing trade deficits, a sub-prime real estate crisis, countless corporate bailouts and a Federal Reserve more than happy to print more money. Why?
The answer to this question consists of the fact that the U.S. Dollar was once the international standard for value throughout the world and large IMF loans made to developing and financially troubled countries continue to be denominated in Dollars.
As a result, the U.S. Dollar dominates the world forex market and continues to act as the world’s primary reserve currency.