Most forex trading happens in what is known as the “interbank market.” This is a global system where banks and financial institutions trade currencies directly with each other.
Unlike stock markets such as the New York Stock Exchange (NYSE) or the London Stock Exchange (LSE), the forex market doesn’t have a physical trading floor or a central exchange.
It operates entirely online through a network of banks and non-bank financial institutions (NBFIs). This system functions continuously, 24 hours a day, across various time zones.
This setup means the forex market is truly global—it isn’t based in one country or city. As long as you have internet access, you can trade currencies from anywhere in the world.
What is the Forex Interbank Network?
The forex market is the largest and most active financial market in the world. It’s traded worldwide by individuals, companies, banks, investment firms, and other institutions.
Since it operates as an over-the-counter (OTC) market, traders don’t have to go through a centralized exchange.
Instead, they can choose who to trade with based on factors like current trading conditions, how competitive the prices are, and the reputation of the other party involved in the trade (also called a counterparty).
Most Traded Currencies in the Forex Market
The chart that ranks the most traded currencies highlights how dominant some currencies are. It’s important to note that every forex transaction involves two currencies, so the total percentage adds up to 200%, not 100%.
- The U.S. dollar (USD) dominates the market, involved in 84.9% of all trades.
- The euro (EUR) comes in second with a 39.1% share.
- The Japanese yen (JPY) ranks third, with 19.0% of the market.
As seen, most of the top currencies belong to developed economies and are frequently used in global trade and finance.
The U.S. Dollar’s Powerful Role in Forex
You’ve probably noticed how often the U.S. dollar is mentioned in discussions about forex. That’s because the USD is part of every major currency pair.
Since major pairs account for about 75% of all forex trades, understanding the U.S. dollar’s role is essential for every trader.
According to data from the International Monetary Fund (IMF), around 62% of global foreign exchange reserves are held in U.S. dollars. These reserves are foreign currency assets kept by central banks to back their own currencies and pay for international obligations.
Because nearly every business, government, and investor uses the U.S. dollar, it attracts a lot of attention from traders.
Why the U.S. Dollar is the Heart of the Forex Market
The U.S. dollar holds such a dominant position in forex for several reasons:
- The United States has the world’s largest economy.
- The U.S. dollar is the official reserve currency of the world.
- The U.S. financial markets are the largest and most liquid.
- The country maintains a stable political environment.
- The U.S. is considered the only global military superpower.
- The dollar is used in about half of all global loans and bonds, making it essential for international borrowing.
- Many cross-border deals are settled in USD—for example, oil is priced in U.S. dollars. If a country like Japan wants to buy oil from Saudi Arabia, it must first exchange yen for dollars.
This dependence means the world constantly needs a steady supply of U.S. dollars to conduct international business, make payments, and settle debts.
The dollar is also the most widely held currency in foreign banks, with a value of around $16.7 trillion held in USD-denominated loans and securities, according to the most recent data.
Speculation: The Main Driver of Forex Trading
The forex market serves several key purposes:
- Exchanging one currency for another.
- Providing short-term loans to support global trade.
- Hedging (or protecting) against changes in exchange rates.
- Speculating on price changes.
While some forex activity comes from businesses and governments trading for real economic reasons, the majority of daily trading volume comes from speculation—traders trying to profit from short-term movements in currency prices.
In fact, it’s estimated that more than 90% of forex trading volume is due to speculation. With so many traders constantly buying and selling currencies, the amount of activity at any moment is massive.
Why Liquidity Matters in Forex
This constant flow of trades gives the forex market very high liquidity—meaning large amounts can be bought or sold without causing big changes in the price.
This is extremely useful for short-term traders. High liquidity ensures that price movements happen smoothly, and trades can be made quickly without waiting for a buyer or seller to appear.
The forex market has become more liquid since the 1970s, creating benefits such as tighter spreads (smaller difference between buying and selling prices) and faster execution of trades.
However, the depth of the market (how many buy and sell orders are available) can still vary depending on the currency pair and time of day. For example, there’s more activity during the overlap of London and New York trading hours than during the Asian session.
In our upcoming lessons about forex trading sessions, we’ll explore how different times of day can impact the currency pairs you’re trading.
But first, let’s take a closer look at the different ways people trade forex as individuals.
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