Foreign exchange, or forex, trading is the largest market in the world -- in 2007, over $3 trillion changed hands each day. There is no central forex trading floor like the New York Stock Exchange for stocks or Chicago Mercantile Exchange for commodities. Instead, banks and brokers made trades by phone and over the Internet. These decentralized, international trades take place 24 hours a day, five and a half days each week.
That means as traders in New York are going to bed, traders half-way around the world in Tokyo and Hong Kong are just waking up. Currency exchange rates fluctuate constantly, depending on the state of a country's economy and political situation, and likely international demand for its goods. Technically, any person who changes money on vacation dips into the forex market; but the major players include:
1. Central banks, which may participate in the forex market to influence its country's currency rate.
2. Banks, which trade with one another with through the interbank system to profit from fluctuating foreign exchange rates.
3. Large companies that do business abroad. Sometimes, these companies even have their own foreign exchange trading desk.
Action Steps
The best contacts and resources to help you get it done
Get current foreign exchange quotes from trusted news sources
Currency value is always quoted in pairs. Foreign exchange quotes are a shorthand that lets traders know how much one currency is worth in another denomination. For instance, USD/EUR = 1.437 means that €1 is worth 1.437 U.S. dollars. There are eight currencies commonly traded on the forex market; of 27 possible currency pairs, 18 are commonly quoted in forex indexes.
I recommend: Get up-to-the-minute currency quotes from
MarketWatch, part of the Wall Street Journal network of online financial news. The
New York Times's market section has currency quotes, in addition to comprehensive coverage of foreign exchange rates news and trends.
Read blogs that discuss currency rates and trading tips
There are innumerable blogs that claim to help readers make a quick buck from currencies trading, which readers should ignore. But there are also blogs that give solid advice on currencies trading and offer helpful tips.
I recommend: The Forex Blog discusses economic and political factors that influence currency value.
E-currency Exchange Blog reviews services that allow investors to trade online, and alerts readers when a service is in financial trouble.
Go straight to the source to learn how monetary policy affects foreign exchange currency rates
Government financial institutions have a role to play in influencing a currency's foreign exchange rate. A strong currency increases a country's purchase power abroad, but makes its own goods less affordable to foreign buyers. A weaker currency may encourage foreign purchasing.
I recommend: Those interested in U.S. monetary policy can find news and quarterly reports from the
Federal Reserve Bank of New York. The
Bank for International Settlements is responsible for coordinating central bank activities worldwide.
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