If you have ever wondered who trades currencies and why, then the answer is fairly straightforward. There are all sorts of players in the foreign exchange or ‘forex’ market.
Banks of all sizes trade currencies with each other electronically in the interbank market, which accounts for the greatest volume of currency traded. Banks trade currencies for their clients and also for the sake of their own profits.
Central banks trade currencies for various reasons, often to increase the competitiveness of their national economy. They might, for instance, weaken the currency by creating an additional supply and then use it to buy foreign currency. The central bank’s national currency is weakened, which makes the country’s exports more competitive. You can see that central banks trade currency as part of national monetary policy
Investment managers trade currencies for the sake of their customers and those managers who operate internationally have to trade currencies so they can trade with foreign securities. Hedge funds also trade speculatively.
Corporations who are engaged in importing and exporting carry out foreign exchange transactions so that they can pay for goods and services. If a British manufacturing company imports American components and sells its finished goods to India, then the British company will exchange sterling for dollars to buy the components and then convert Indian rupees to sterling to make its profit. The same company might hedge against the risk in currency trades.
Individual investors make up the smallest part of the foreign exchange market, but the trade in currencies is rapidly growing in popularity, with more retail investors trading for the profits that can be made in this market.
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