Introduction to Forex

Foreign exchange is the term used to illustrate the exchange of a currency of a certain nation to the currency of another. It is the largest market in the planet and its average daily turn over exceeds 3.2 trillion US$. Foreign exchange (FOREX) is also termed as currency exchange.




There exists always a fluctuation in the relative values between currencies. First and foremost two reasons for this fluctuation can be mentioned. The first reason, put in simple terms, when a foreigner comes into a country and wishes to buy things, or invest; he is compelled to change his money into local currency, which drastically changes the demand for the currency. The second reason is speculation. When a buyer or seller feels that the currency acts strongly or weakly he buys or sells accordingly, which stimulates the fluctuation of the value of that currency.

FOREX is said to approximate a perfect market than any other market in practice. According to international statistics foreign exchange markets have continued to grow for the last few years. It had a drastic growth in 2007 as it had a 38% leap between 2006 April and 2007 April. London occupies the cockpit of FOREX as it consumes 34.1% of the total market turnover; New York comes in second with 16.6% and Tokyo with 6.1%. FOREX markets operate round the clock 24 hours a day excluding weekends. While the Asian FOREX markets put up the shutters at the end of the day, American markets open and then continued by European markets, which explains the phrase ‘FOREX markets operate round the clock’. Foreign currency exchange rates do not hang on to a fixed rate all around the globe; they do not have a unified market, but rather have different prices. But since the London market dominates the FOREX industry, London exchange rates are considered to be the reference, although the trading takes place in New York, Tokyo, Singapore, and Hong Kong.

No other market in the world is as fragile to the world events as the foreign exchange market. Foreign exchange rates simply depend upon the demand and supply of that currency. There are ample factors that affect the demand and supply of a currency. They can be classified as economical, political and market psychological factors. Considering the economical factors, budget deficits provide a negative impact on the currency value. Greater the deficits, the weaker become the currency. Consistent trade between nations demonstrates the demand for goods, which eventually pushes the demand for the country’s currency to perform the trade and eventually the currency’s demand gets boosted. Inflation is yet another economical factor that affects the value of a currency. Inflation weakens a country’s demanding power and consequently abates the value of currency.