Why is the Foreign Exchange Market Interesting?
Why is the Foreign Exchange Market Interesting?
The Foreign Exchange market is actually a worldwide decentralized or virtual over-the-counter interbank market for the trading of different currencies. This marketplace normally determines foreign exchange rates for each currency. It includes all the aspects of purchasing, selling, and trading currencies in determined or current prices. In general, most of the business involved in the Foreign Exchange is the buying and selling of currencies from various countries.
This is actually where the FOMC comes in. The Federal Open Market Committee or the FOMC is the central authority in the US that is responsible for keeping a track of the foreign exchange market operations. The main reason why the FOMC is given the responsibility of monitoring the Forex is that they are the ones who have the power to control the foreign currency exchange market. In fact, they also guarantee that the market will remain stable and fair for all participants, which includes you, the trader.
Basically, there are three major markets where the foreign exchange rate is observed: the NYM, the London market, and the Sydney market. The two major players in the said markets are the United States and the European Union. These three markets fluctuate with the state of the economy of the respective countries. The US and the EU mainly trade with one another while Japan, Asia, and the emerging economies of other countries engage in trading on a more frequent basis with the US. Because of the aforementioned, the exchange rate between one currency and another currency plays a very important role in the stability of the Forex market.
There are several reasons why foreign exchange traders consider buying currencies other than the ones they intend to sell. Forex speculation is one of the reasons why this occurs. When the value of one currency is predicted to increase, then traders expect the value of the currencies they bought to go up as well. In the same way, when traders think that the value of the currencies they had sold will drop, they would like to buy those same currencies with the hope that the value of the new currencies that they will purchase will rise again. This is the essence of the foreign exchange market trading.
On average, foreign exchange markets trade approximately eight trillion dollars per day. This figure has been reached since the beginning of the year 2020. The figure was made possible by the financial crisis in the US, which created panic in the market. At the time, millions of people lost their jobs and their homes and the country’s economy took a huge hit. Investors were affected adversely by this wave of negative economic indicators and the market eventually began to weaken.
This decline in the foreign exchange markets affected the buying power of many investors worldwide. Forex speculators who are primarily from developed countries such as the US, UK, and Australia lost confidence in the US dollar. In response, these countries lowered their purchases of US dollars as the value of their own local currencies declined. At the same time, many investors who have huge portfolios of foreign currency also lost confidence in the US dollar and started buying Euros, Yen, and other foreign currencies instead. At the end of the day, foreign exchange markets were no longer flooded with US dollars but with other currencies.
With the devaluation of the currencies, the prices of commodities began to drop significantly. For example, if one was buying potatoes in the UK, a person could now buy potatoes for just $4.00. When the value of the British pound was reduced, so was the price of other similar commodities. Similarly, oil and other commodity prices fell significantly when the value of the US dollar was depreciated. This phenomenon has been repeated all over the world, with the recent global economic meltdown being the worst in the last ten years.
The situation is such that the foreign exchange markets are actually run by algorithms. These algorithms translate all the information which is available on the market at the moment into real-time information on the exact value of currencies around the world. If someone were to log on to the foreign exchange markets at midnight on a Sunday and figure out how much the pound should be worth in the US dollar, they would get the answer by simply clicking on a button. At the present time, the algorithms that translate information are still not up to the task of determining the precise values of foreign currencies. Only humans can do this is what makes the foreign exchange markets so intriguing and exciting to many new traders.