The Foreign Exchange Market, commonly now known as the Forex is meant for trading between the different currencies of the world. Whenever a holder of one currency wants to exchange it for another he sells the former and buys the latter. The reason for such an exchange may be the need for buying the commodities and services of the country of the second currency. But another major reason is making a profit. People with such motives buy a currency when its market rate is low and sell it when the value of the same goes up. Currency trading is done between governments, central banks, big banks speculators and multinational corporations. As such no trade between nations can take place without a foreign exchange market.
The total volume of trade is very large. Compared to that, the volume handled by a trader or a group of traders is very small. A group of institutions or even a government cannot influence the movements in the market. So, the market value of any currency represents the true strength or weakness of the economic condition of its country. Hence the foreign exchange market is truly a fair and neat place of competition. True, some governments or their central banks intervene to stabilize their own currency. When its value falls the central bank buys its own currency in the foreign exchange market. Other currencies are given in exchange. Thus an artificial demand is created. Then the value goes up. Likewise, when the value goes up above the desired level more currency of that country is pumped into the market. The latter is easy to do but the former method requires large foreign currency reserve in their possession. Thus it is almost impossible to artificially inflate the value of any currency.
The trading between banks plays a major part in the total turnover in the foreign exchange market. They buy on behalf of their customers as well as for their own reserves for future trading. Foreign exchange brokers could influence the volume of trade until a few years ago. They used to cater to the needs of banks too. But now the availability of very efficient electronic systems has excluded the services of brokers. Such systems provide quick and more efficient service.
The Forex makes the international trade possible. In the absence of a foreign exchange market, as there is no common currency for them, the sellers and buyers of goods and services cannot evaluate what they get or give. The seller will be paid in the currency of the buyer. With that money the seller has to buy goods from the former buyer's country. Only when he brings back to his country and sells such commodities he will come to know what he got for his exports. Through the foreign exchange market the seller will know exactly what he will get in his country's currency for the goods he exports. Likewise, the buyer will know what it will cost in his currency for the same goods.
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