Key Players in the Forex Market

So, who are the key players responsible for creating such a substantial daily turnover volume in the FX market?

1. Governments and central banks: National governments and central banks play a significant role in the FX market to either strengthen or weaken their currency by buying it or selling it respectively and adjusting their foreign exchange reserves. A central bank could, however, intervene in the forex market to increase or decrease inflationary pressures within their economy. In general, however, a weaker domestic currency stimulates export and makes imports more expensive.
2. Commercial banks and financial institutions: Commercial banks and financial institutions address the foreign exchange needs of their clients which includes imports and exports, as well as small-scale transactions with other banks. Other financial institutions include hedge funds and investment managers that may also participate in the FX market with substantial trading volumes.
3. Companies repatriating profits and multinational corporations: Consider the case of Toyota, which operates a factory in the UK and wants to repatriate its annual profits to its mother company in Japan. To be able to convert the gains in pounds to Japanese yen, it will need to go through the FX market. Alternatively, a multinational corporation company may want to transfer funds from a branch in one country to a branch in another company.
4. Investors buying assets abroad: For example, a European investor looking to buy stocks on a US exchange would need to exchange euros into US dollars.
5. Speculators: Speculators engage in high-risk financial transactions to profit from short-term fluctuations in the price of a tradable financial instrument.
6. Tourists and travellers: Although individual tourists and travellers may not have a significant impact on the market, trends in the tourism industry can influence the FX market. For instance, during the summer season when UK citizens go on vacation to southern Europe, they must exchange their pounds into euros. While each tourist’s impact may be small, the cumulative effect of millions of tourists can influence currency values. Conversely, the effects can be reversed. In smaller economies, a large influx of tourists might lead to the appreciation of a country’s currency but also a devaluation of the same currency can enhance a country’s appeal as a tourist destination.