The foreign exchange (forex) market is the largest and most liquid financial market in the world. The majority of trading happens in what’s called the “interbank market,” a decentralized space where banks, financial institutions, and individual traders interact.
Unlike traditional financial markets such as the New York Stock Exchange (NYSE) or London Stock Exchange (LSE), the forex market doesn’t operate in a physical building or through a central exchange. Instead, it’s a global, electronic, over-the-counter (OTC) network that operates 24 hours a day, five days a week.
This means that forex trading happens all around the world, anytime, anywhere, as long as you have an internet connection. There’s no single place where all the trades occur—it’s entirely virtual and constantly active.
Forex Interbank Network: How It Works
The forex OTC market is the largest financial marketplace globally, involving an enormous number of participants. These include central banks, commercial banks, hedge funds, corporations, and millions of individual traders.
In an OTC market, participants don’t have to accept the first price they see. Instead, they choose who to trade with, depending on factors like the best available price, the reputation of the counterparty (the person or institution on the other side of the trade), and trading terms. This flexibility attracts massive trading volumes every day.
Top Currencies in Forex Trading
Since every forex trade involves a pair of currencies, the percentage totals of individual currency usage add up to 200%, not 100%.
According to recent statistics:
- The U.S. dollar (USD) is involved in a staggering 84.9% of all forex transactions.
- The euro (EUR) comes second, participating in 39.1% of trades.
- The Japanese yen (JPY) ranks third with 19.0%.
As you can see, these major currencies dominate forex trading, with the U.S. dollar leading the pack.
Why the U.S. Dollar is the King of Forex
You’ll notice the U.S. dollar is constantly mentioned when discussing forex. That’s because it plays a central role in global finance:
- The USD is part of every major currency pair.
- Major pairs account for about 75% of all trading volume.
- The USD is the most recognized and trusted currency worldwide.
The International Monetary Fund (IMF) reports that the U.S. dollar makes up about 62% of global foreign exchange reserves, meaning central banks across the globe hold large amounts of USD.
Foreign exchange reserves are foreign currencies held by a country’s central bank to stabilize its own currency and economy. And since almost all international entities own and trade USD, its importance in the forex market cannot be overstated.
Reasons Behind the Dominance of the U.S. Dollar
There are multiple reasons why the USD holds such a dominant position in forex trading:
- The United States has the largest economy in the world.
- The USD is the world’s primary reserve currency.
- U.S. financial markets are the most liquid and developed globally.
- The U.S. maintains a stable political system, encouraging global trust.
- It is the world’s only full-scale military superpower.
- Over half of global loans and bonds are issued in U.S. dollars.
- Many global trade transactions (like oil sales) are priced and settled in USD, known as petrodollars.
For example, if Japan wants to import oil from Saudi Arabia, it must pay in U.S. dollars. If Japan doesn’t already have USD, it must exchange yen for dollars first—causing demand for the USD in such transactions.
USD as the Global Reserve Currency
In short, the entire world depends on the availability of USD to carry out international trade, business, and loans.
Global banks are more interested in holding U.S. dollars than any other currency. According to the most recent data, foreign bank assets such as loans and bonds denominated in USD total around $16.7 trillion.
This high demand for USD makes it an essential part of every trader’s strategy and a core element in the forex market’s overall structure.
Speculation Drives Forex Trading
The forex market serves multiple purposes:
- It allows currency conversion from one country’s currency to another.
- It offers short-term credit for international trade.
- It helps hedge against exchange rate fluctuations.
- It provides opportunities for speculation—buying and selling based on expected price changes.
While some forex activity comes from commercial or financial needs (like international business payments), a huge part of trading—over 90%—is based on speculation. These speculative trades are made by traders looking to profit from small price movements in currency pairs.
Why Liquidity Matters in Forex
Because of this enormous trading volume, the forex market is highly liquid. Liquidity means that assets can be bought or sold quickly without causing significant price changes.
This is great news for short-term traders. In a liquid market like forex, they can enter or exit trades easily, without worrying about major price swings caused by their own trading activity.
The growth in market liquidity since the 1970s has created many benefits, including tighter spreads, faster trade execution, and more stable pricing—especially in major currency pairs.
Forex Market Depth and Timing
Even though forex is very liquid overall, liquidity can vary depending on:
- The currency pair you are trading.
- The time of day you are trading.
During certain hours (such as when major markets like London or New York are open), liquidity and volatility tend to increase. That’s why it’s important for traders to understand forex trading sessions, which will be covered later in this guide.
Conclusion
The forex market’s enormous size and liquidity make it unique among financial markets. Its decentralized, 24-hour nature ensures constant access and opportunity.
With the U.S. dollar at its core and speculative trading as a primary driver, forex remains the most active and dynamic trading space in the world.
Whether you’re a beginner or an experienced trader, understanding these fundamentals will help you navigate and succeed in the world of currency trading.
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