The purpose of the foreign exchange market is to help international trade and investment. A foreign exchange market helps businesses convert one currency to another. For example, it permits a U.S. business to import European goods and pay Euros, even though the business's income is in U.S. dollars.
In a typical foreign exchange transaction a party purchases a quantity of one currency by paying a quantity of another currency. The modern foreign exchange market started forming during the 1970s when countries gradually switched to floating exchange rates from the previous exchange rate regime, which remained fixed as per the Bretton Woods system.
The foreign exchange market is unique because of
. its trading volumes,
. the extreme liquidity of the market,
. its geographical dispersion,
. its long trading hours: 24 hours a day except on weekends (from 20:15 UTC on .
. the variety of factors that affect exchange rates.(Sunday until 22:00 UTC Friday),
. the low margins of profit compared with other markets of fixed income (but
profits can be high due to very large trading volumes)
. the use of leverage
As such, it has been referred to as the market closest to the ideal perfect competition, notwithstanding market manipulation by central banks.According to the Bank for International Settlements,average daily turnover in global foreign exchange markets is estimated at $3.98 trillion. Trading in the world's main financial markets accounted for $3.21 trillion of this. This approximately $3.21 trillion in main foreign exchange market turnover was broken down as follows:
. $1.005 trillion in spot transactions
. $362 billion in outright forwards
. $1.714 trillion in foreign exchange swaps
. $129 billion estimated gaps in reporting
The euro (€) is the official currency of the European Union, and is currently in use in 16 of the 27 Member States. The states, known collectively as the Eurozone, are Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain.The currency is also used in a further five European countries, with and without formal agreements, and is consequently used daily by some 327 million Europeans.Over 175 million people worldwide use currencies which are pegged to the euro, including more than 150 million people in Africa.
The euro is the second largest reserve currency and the second most traded currency in the world after the U.S. dollar.[19] As of November 2008[update], with more than €751 billion in circulation, the euro is the currency with the highest combined value of cash in circulation in the world, having surpassed the U.S. dollar Based on IMF estimates of 2008 GDP and purchasing power parity among the various currencies, the Eurozone is the second largest economy in the world.
The name euro was officially adopted on 16 December 1995.[22] The euro was introduced to world financial markets as an accounting currency on 1 January 1999, replacing the former European Currency Unit (ECU) at a ratio of 1:1. Euro coins and banknotes entered circulation on 1 January 2002. On 1 December 2009 the Treaty of Lisbon entered into force, and with it the euro became the official currency of the European Union.
The United States dollar (sign: $; code: USD) is the unit of currency of the United States. The U.S. dollar is normally abbreviated as the dollar sign, $, or as USD or US$ to distinguish it from other dollar-denominated currencies and from others that use the $ symbol. It is divided into 100 cents (200 half-cents prior to 1857).
The U.S. dollar is the currency most used in international transactions.Several countries use it as their official currency, and in many others it is the de facto currency.
