FOREIGN EXCHANGE

The foreign exchange market – also called forex, FX, or currency market – was one of the original financial markets formed to bring structure to the burgeoning global economy. In terms of trading volume, it is, by far, the largest financial market in the world. Aside from providing a venue for the buying, selling, exchanging, and speculating currencies, the forex market also enables currency conversion for international trade settlements and investments. According to the Bank for International Settlements (BIS), which is owned by the central bank, trading in foreign exchange markets averaged $6.6 trillion per day in April 2019.1 

Currencies are always traded in pairs, so the "value" of one of the currencies in that pair is relative to each other's value. This determines how much of country A's currency country B can buy, and vice versa. Establishing this relationship (price) for the global markets is the foreign exchange market's main function. This also greatly enhances liquidity in all other financial markets, which is key to overall stability.

A country's currency's value depends on whether it is a "free float" or "fixed float." Free-floating currencies are those whose relative value is determined by free-market forces, such as supply/demand relationships. A fixed float is where a country's governing body sets its currency's relative value to other currencies, often by pegging it to some standard. Free-floating currencies include the U.S. Dollar, Japanese Yen, and British Pound, while examples of fixed floating currencies include the Chinese Yuan and the Indian Rupee.

One of the forex market's unique features is that it comprises a global network of financial centers that transact 24 hours a day, closing only on the weekends. As one major forex hub closes, another hub in a different part of the world remains open for business. This increases the liquidity available in currency markets, which adds to its appeal as the largest asset class available to investors.