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Thursday, April 23, 2009

Trading characteristics

Most traded currencies
Currency distribution of reported FX market turnover
Rank Currency ISO 4217 code
(Symbol)
% daily share
(April 2007)
1 Flag of the United StatesUnited States dollar USD ($) 86.3%
2 Flag of EuropeEuro EUR (€) 37.0%
3 Flag of JapanJapanese yen JPY (¥) 17.0%
4 Flag of the United KingdomPound sterling GBP (£) 15.0%
5 Flag of SwitzerlandSwiss franc CHF (Fr) 6.8%
6 Flag of AustraliaAustralian dollar AUD ($) 6.7%
7 Flag of CanadaCanadian dollar CAD ($) 4.2%
8-9 Flag of SwedenSwedish krona SEK (kr) 2.8%
8-9 Flag of Hong KongHong Kong dollar HKD ($) 2.8%
10 Flag of NorwayNorwegian krone NOK (kr) 2.2%
11 Flag of New ZealandNew Zealand dollar NZD ($) 1.9%
12 Flag of MexicoMexican peso MXN ($) 1.3%
13 Flag of SingaporeSingapore dollar SGD ($) 1.2%
14 Flag of South KoreaSouth Korean won KRW (₩) 1.1%
Other 14.5%
Total 200%

There is no unified or centrally cleared market for the majority of FX trades, and there is very little cross-border regulation. Due to the over-the-counter (OTC) nature of currency markets, there are rather a number of interconnected marketplaces, where different currencies instruments are traded. This implies that there is not a single exchange rate but rather a number of different rates (prices), depending on what bank or market maker is trading, and where it is. In practice the rates are often very close, otherwise they could be exploited by arbitrageurs instantaneously. Due to London's dominance in the market, a particular currency's quoted price is usually the London market price. A joint venture of the Chicago Mercantile Exchange and Reuters, called Fxmarketspace opened in 2007 and aspired but failed to the role of a central market clearing mechanism. The main trading center is London, but New York, Tokyo, Hong Kong and Singapore are all important centers as well. Banks throughout the world participate. Currency trading happens continuously throughout the day; as the Asian trading session ends, the European session begins, followed by the North American session and then back to the Asian session, excluding weekends. Fluctuations in exchange rates are usually caused by actual monetary flows as well as by expectations of changes in monetary flows caused by changes in gross domestic product (GDP) growth, inflation (purchasing power parity theory), interest rates (interest rate parity, Domestic Fisher effect, International Fisher effect), budget and trade deficits or surpluses, large cross-border M&A deals 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. However, the large banks have an important advantage; they can see their customers' order flow.

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