The Market That Dwarfs the Stock Market

Durable Goods Order. Escrow Account. European Central Bank. European Monetary Unit. European Union. Factory Orders.

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Fed Meetings. Federal Deposit Insurance Corporation. Federal Funds Rate. Federal Open Market Committee. Federal Reserve. Federal Reserve Board.

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Fiscal Policy. Flexible Exchange Rate.

Types of Brokers

Foreign Exchange. Foreign Exchange Center. Forward Rates. Full-Service Broker. Great Britain Pound. Gross Domestic Product. Gross National Product. Hometrack Housing Survey. Industrial Production.

Initial Margin. Initial Margin Requirement. Interbank Market. International Monetary Fund. ISM Manufacturing Index. ISM Non-Manufacturing. Japanese Yen. Large Retailers Sales. Liquid Market. M3 Money Supply. Maintenance Margin. Mark To Market.

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Market Maker. Monetary Policy. Narrow Market. No matter how much the currency falls, they will not lose more than the forward price.

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Meanwhile, they can invest the currency they bought on the spot market. The interbank market is a network of banks that trade currencies with each other. Each has a currency trading desk called a dealing desk. They are in contact with each other continuously. That process makes sure exchange rates are uniform around the world.

The minimum trade is 1 million of the currency being traded. Most trades are much larger, between 10 million and million in value. As a result, exchange rates are dictated by the interbank market. The interbank market includes the three trades mentioned above. It allows them to transfer foreign exchange to each other.

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Banks trade to create profit for themselves and their clients. When they trade for themselves, it's called proprietary trading. Their customers include governments, sovereign wealth funds, large corporations, hedge funds, and wealthy individuals. The Chicago Mercantile Exchange was the first to offer currency trading.

It launched the International Monetary Market in The retail market has more traders than the Interbank Market. But the total dollar amount traded is less. The retail market doesn't influence exchange rates as much. Central banks don't regularly trade currencies in foreign exchange markets.

But they have a significant influence. Central banks hold billions in foreign exchange reserves. Japanese companies receive dollars in payment for exports. They exchange them for yen to pay their workers. That makes Japanese exports cheaper. Japan prefers to use methods that are more indirect though, such as raising or lowering interest rates to affect the yen's value. For example, in , the Federal Reserve announced it would raise interest rates in Here's how they did it. Traders at the banks would collaborate in online chat rooms.

One trader would agree to build a huge position in a currency, then unload it at 4 p. London Time each day. That price is based on all the trades taking place in one minute.

By selling a currency during that minute, the trader could lower the fix price. That's the price used to calculate benchmarks in mutual funds. Traders at the other banks would also profit because they knew what the fix price would be. For the past years, there has been some form of a foreign exchange market. For most of U. They used forex markets to hedge their exposure to overseas currencies.

They could do so because the U. The foreign exchange market didn't take off until That's when President Nixon completely untied the value of the dollar to the price of an ounce of gold.

Definition of "Dealing Desk" in Forex Trading

The history of the gold standard explains why gold was chosen to back up the dollar. Once Nixon abolished the gold standard, the dollar's value quickly plummeted. The dollar index was established to give companies the ability to hedge this risk. Someone created the U. Dollar Index to give them a tradeable platform.

Soon, banks, hedge funds, and some speculative traders entered the market. They were more interested in chasing profit than in hedging risks. The Forex market buys and sells currencies. It operates on two levels: interbank and over-the-counter. The interbank market trades in enormous volumes.