Currency and the Forex Market
In a global economy, currency is the tool that fuels the movement of goods from one country to another. The need to trade currency might seem removed from your daily transactions; however, a closer look highlights the fundamental need for this process in the system of buying and selling. Take a look at the tags or descriptions on the products you buy, and you are quickly enlightened to the workings of a global economy. You might notice your favorite olive oil is imported from Italy, your favorite chocolate from Switzerland. Somewhere along the line currency was traded so that your favorite products could sit on the grocery store shelf. You now pay for this good in your U.S. dollars- thus outlining the ebb and flow of different currencies.
A Closer Look
When the grocery store goes to buy olive oil from an artisan maker in Italy they must trade their U.S. dollars for Euros. Enter the foreign exchange market- the place where currency is traded at the current exchange rate. These types of exchanges are happening on a large scale across all major time zones and currencies. While the grocery store may want olive oil from Italy, that same artisanal maker might need a bottle to store his olive oil in from the U.S. The need for daily currency exchange makes the foreign exchange market the largest investment market in the world. The market for trading currency continues to grow as the world becomes globally connected economically.
The Foreign Exchange Market: How it Works
Currency is traded over the counter. The forex market exists in the cyber world as opposed to the centralized formal setting of the stock market. This electronic trading happens through an online brokerage account in which a base currency is converted to the desired currency at the present exchange rate. A list of foreign exchange brokers currently accepting U.S. clients can be found at fx-list.com/brokers-for-us-traders
The forex market stays open 24 hours a day across the major time zones. As the trading day in the U.S. comes to an end, the day begins in Japan. The 24- hour period of trade is divided into three sessions- The European, Asian, and U.S. The dominant currency of each session is primarily traded during those market hours. The global nature of the forex market creates an extremely active marketplace with constant fluctuations in price.
Trading in the forex markets happens in currency pairs. All trades involve the sale of a currency for the purchase of another. Currency pairs involve the price quote of a currency against a base currency; the base currency is listed first in the pair followed by the quoted currency. This allows the value of one currency to be compared with that of another.
One of the most widely traded currency pairs is the EUR/USD. If the current exchange rate is 1.25, then selling 1 EUR would give the trader 1.25 USD. Any trade on the forex market occurs in this kind of pairing.
This kind of trading is different from that of the stock market where you can buy and sell shares of stock independent of their relative values. In the forex market, all trades are based on quoting or speculating the value of one currency in comparison to that of another.
The need to exchange currency is abundant. All across the world, there are people just like you and the artisan- people that need to trade currency for the movement and purchase of goods. The need for currency exchange makes the forex market the largest and most liquid market in the world. A place for buying and selling, exchanging and speculation, the forex marketplace is dynamic and active.