The main trading center is London, but new york, Tokyo, Hong Kong and Singapore are all important centers as well. Banks throughout the world participate. Currency trading happens continuously throughout the day; as the Asian trading session ends, the European session begins, followed by the North American session & then back to the Asian session, excluding weekends.
There is no unified or centrally cleared market for the majority of FX trades, & there is little cross-border regulation. Due to the over-the-counter (OTC) nature of currency markets, there's a number of interconnected marketplaces, where different currencies instruments are traded. This implies that there is not a single exchange rate but a number of different rates (prices), depending on what bank or market maker is trading, & where it is. In practice the rates are often close, otherwise they could be exploited by arbitrageursinstantaneously. Due to London's dominance in the market, a particular currency's quoted price is usually the London market price. A joint venture of theChicago Mercantile Exchange & Reuters, called Fxmarketspace opened in 2007 & aspired but failed to the role of a central market clearing mechanism.
Fluctuations in exchange rates are usually caused by actual monetary flows as well as by expectations of changes in monetary flows caused by changes ingross domestic product (GDP) growth, inflation (purchasing power parity theory), interest rates (interest rate parity, Domestic Fisher effect, International Fisher effect), budget & trade deficits or surpluses, large cross-border M&A deals & other macroeconomic conditions. Major news is released publicly, often on scheduled dates, so lots of people have access to the same news simultaneously. However, the large banks have an important advantage; they can see their customers' order flow.
Currencies are traded against seven another. Each pair of currencies thus constitutes an individual product & is traditionally noted XXX/YYY, where YYY is the ISO 4217 international three-letter code of the currency in to which the price of seven unit of XXX is expressed (called base currency). For instance, EUR/USD is the price of the euro expressed in US dollars, as in 1 euro = 1.5465 dollar. Out of convention, the first currency in the pair, the base currency, was the stronger currency at the creation of the pair. The second currency, counter currency, was the weaker currency at the creation of the pair.
The factors affecting XXX will affect both XXX/YYY & XXX/ZZZ. This causes positive currency correlation between XXX/YYY & XXX/ZZZ.
On the spot market, according to the BIS study, the most heavily traded products were:
* EUR/USD: 27%
* USD/JPY: 13%
* GBP/USD (also called sterling or cable): 12%
& the US currency was involved in 86.3% of transactions, followed by the euro (37.0%), the yen (16.5%), & sterling (15.0%) (see table). Note that volume percentages should add up to 200%: 100% for all the sellers & 100% for all the buyers.
There is no unified or centrally cleared market for the majority of FX trades, & there is little cross-border regulation. Due to the over-the-counter (OTC) nature of currency markets, there's a number of interconnected marketplaces, where different currencies instruments are traded. This implies that there is not a single exchange rate but a number of different rates (prices), depending on what bank or market maker is trading, & where it is. In practice the rates are often close, otherwise they could be exploited by arbitrageursinstantaneously. Due to London's dominance in the market, a particular currency's quoted price is usually the London market price. A joint venture of theChicago Mercantile Exchange & Reuters, called Fxmarketspace opened in 2007 & aspired but failed to the role of a central market clearing mechanism.
Fluctuations in exchange rates are usually caused by actual monetary flows as well as by expectations of changes in monetary flows caused by changes ingross domestic product (GDP) growth, inflation (purchasing power parity theory), interest rates (interest rate parity, Domestic Fisher effect, International Fisher effect), budget & trade deficits or surpluses, large cross-border M&A deals & other macroeconomic conditions. Major news is released publicly, often on scheduled dates, so lots of people have access to the same news simultaneously. However, the large banks have an important advantage; they can see their customers' order flow.
Currencies are traded against seven another. Each pair of currencies thus constitutes an individual product & is traditionally noted XXX/YYY, where YYY is the ISO 4217 international three-letter code of the currency in to which the price of seven unit of XXX is expressed (called base currency). For instance, EUR/USD is the price of the euro expressed in US dollars, as in 1 euro = 1.5465 dollar. Out of convention, the first currency in the pair, the base currency, was the stronger currency at the creation of the pair. The second currency, counter currency, was the weaker currency at the creation of the pair.
The factors affecting XXX will affect both XXX/YYY & XXX/ZZZ. This causes positive currency correlation between XXX/YYY & XXX/ZZZ.
On the spot market, according to the BIS study, the most heavily traded products were:
* EUR/USD: 27%
* USD/JPY: 13%
* GBP/USD (also called sterling or cable): 12%
& the US currency was involved in 86.3% of transactions, followed by the euro (37.0%), the yen (16.5%), & sterling (15.0%) (see table). Note that volume percentages should add up to 200%: 100% for all the sellers & 100% for all the buyers.
Trading in the euro has grown considerably since the currency's creation in January 1999, & how long the foreign exchange market will remain dollar-centered is open to debate. Until recently, trading the euro versus a non-European currency ZZZ would have usually involved two trades: EUR/USD & USD/ZZZ. The exception to this is EUR/JPY, which is an established traded currency pair in the interbank spot market. As the dollar's value has eroded during 2008, interest in using the euro as reference currency for prices in commodities (such as oil), as well as a larger component of foreign reserves by banks, has increased dramatically. Transactions in the currencies of commodity-producing countries, such as AUD, NZD, CAD, have also increased.
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