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National central banks play an important role in the forex Exch. market.

They try to control the money supply, inflation, and/or interest rates and often have official or unofficial target rates for their currencies. They can use their often substantial foreign exchange reserves, to stabilize the market. Milton Friedman argued that the best stabilization strategy would be for central banks to buy when the exchange rate is too low, and to sell when the rate is too high - that is, to trade for a profit. Nevertheless, central banks do not go bankrupt if they make large losses, like other traders would, and there is no convincing evidence that they do make a profit trading.The mere expectation or rumor of central bank intervention might be enough to stabilize a currency, but aggressive intervention might be used several times each year in countries with a dirty float currency regime. Central banks do not always achieve their objectives, however. The combined resources of the market can easily overwhelm any central bank.

 

The main trading centers are in London, New York, and Tokyo, but banks throughout the world participate. As the Asian trading session ends, the European session begins, then the US session, and then the Asian begin in their turns. Traders can react to news when it breaks, rather than waiting for the market to open.
In April 2004 the average daily international foreign exchange trading volume was $1.9 trillion, according to the BIS study (Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity 2004 - Final Results).

Trading characteristics

Due to the over-the-counter (OTC) nature of currency markets, there is no single unified foreign exchange market, there are rather a number of interconnected marketplaces, where different currency instruments are traded. This implies that there is no such thing as a single dollar rate - but rather a number of different rates (prices), depending on what bank or market maker is trading. However, in practice the rates are often very close, otherwise they could be exploited by arbitrageurs.

Most Traded

Due On the spot market, according to the BIS study, the most heavily traded products were: EUR/USD (28%), USD/JPY (17%),  and GBP/USD (14%). 
The US currency was involved 89% of transactions, followed by the Euro (37%), the Yen (20%) and Sterling (17%). 

Although trading in the euro has grown considerably since the currency's creation in January 1999, the foreign exchange market is thus still largely dollar-centered.

 

No Insiders

There is little or no 'inside information' in the foreign exchange markets. Exchange rate fluctuations are usually caused by actual monetary flows as well as by expectations of changes in monetary flows caused by changes in GDP growth, inflation, interest rates, budget and trade deficits or surpluses, and other macroeconomic conditions. Major news is released publicly, often on scheduled dates, so many people have access to the same news at the same time.

 

 

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