Forex Market
The Forex (Foreign Exchange) Market is the global decentralized marketplace where currencies are traded against each other, operating 24 hours a day across major financial centers and constituting the largest and most liquid financial market in the world by daily trading volume.
The foreign exchange market is not a centralized exchange like the NYSE or NASDAQ. It is an over-the-counter (OTC) network of banks, broker-dealers, institutional investors, corporations, and central banks transacting directly or through electronic trading platforms. Daily global forex turnover exceeded $7.5 trillion as of the most recent BIS Triennial Central Bank Survey, dwarfing the combined daily volume of equity and bond markets.
Currency trading occurs in pairs: every transaction involves simultaneously buying one currency and selling another. The exchange rate expresses how much of the quote currency is required to buy one unit of the base currency. In the EUR/USD pair, for example, a rate of 1.0850 means one Euro buys $1.0850 US dollars. The most actively traded pairs — known as the majors — involve the US dollar paired with the Euro, Japanese yen, British pound, Swiss franc, Canadian dollar, and Australian dollar, which together account for the majority of global forex volume.
The forex market operates across overlapping trading sessions: Sydney opens at the start of the week (Sunday evening US Eastern time), followed by Tokyo, then London (the largest forex center by volume), and finally New York. The London-New York overlap from roughly 8 AM to noon Eastern time is typically the most liquid and volatile period. Markets are effectively continuous from Sunday evening through Friday afternoon Eastern time, with very thin liquidity over the weekend.
Factors that drive currency valuations include interest rate differentials between countries (currencies of higher-yielding economies tend to attract capital), inflation differentials (high inflation erodes purchasing power and typically weakens a currency over time), current account balances (persistent trade surpluses support currency strength), economic growth differentials, and geopolitical risk. Central bank policy decisions — particularly from the Federal Reserve, European Central Bank, Bank of Japan, and Bank of England — are the most significant recurring catalysts for major currency moves.
For equity investors, forex matters even when not trading currencies directly. Companies in the S&P 500 generate a substantial portion of revenues internationally; a stronger dollar reduces the dollar-translated value of those earnings and creates a headwind for US multinational profits. Conversely, a weaker dollar is generally supportive for US large-cap earnings with international exposure.