Commercial banking organizations carry out the majority of foreign exchange transactions. Other financial market participants open their accounts in banks to make the necessary deposit and credit and foreign exchange transactions. Through the transactions with customers, banking organizations aggregate the demand of modern financial markets for foreign exchange transactions, as well as for raising capital, and trade with other banks. In addition to working with clients, banking institutions may carry out transactions with their own funds.
In fact, online currency trading market is nothing more than a ground for interbank transactions. Therefore, when we talk about interest rates and exchange rates movement, we should imply the interbank foreign exchange market. The most influential on the market are, no doubt, the major international banks, which make foreign exchange transactions amounting to several billion US dollars, for example, Barclays Bank, Citibank, Union Bank of Switzerland, etc. The main difference between those banks and other banking institutions is the volume of transactions, which may affect the currency price.
Major exchange players are conventionally divided into “bears” and “bulls”. The bears are interested in reducing the nominal price, the bulls, on the contrary, want the price to rise. However, in the foreign exchange market these two groups are balanced, so the difference in currency prices varies very slightly. However, when the bears or the bulls take over, the currency rates significantly and sharply change.
Companies participating in international monetary trade as importers have a stable demand for foreign capital and supply of currency. In addition, they raise and place their currency balances and short-term deposits. However, such companies make deposits and foreign exchange transactions through commercial banks, since they do not have direct access to the currency market.
These companies represent various international investment funds, whose policies dictate a diversified management of portfolio assets, i.e. investment in securities of major corporations and governments of various countries. In dealer’s language, they are simply “funds”.
The best-known funds are “Quantum” of George Soros, famous for its successful currency trading, and the Dean Witter Company. This group of Forex participants also includes international corporations, specializing in foreign production investments: joint ventures, representative offices, etc. An example would be such companies as Xerox, Nestle, British Petroleum, etc.
The main objective of central banks is monetary coordination in the foreign market, namely the prevention of sharp fluctuations in national currency exchange rate in order to avoid the financial and economic crises, as well as maintaining the balance of imports and exports.
Central banks can affect the currency market both directly and indirectly: either in the form of currency intervention or by coordinating the volume of money and interest rates. Central banks can not act as bears or bulls, as they operate for both rise and fall. A central bank, either alone or centrally with other banking institutions, operates for joint investment or implementation of a common monetary policy. The most influential of the central banks are the US Federal Reserve, the German Bundesbank and the Bank of England (or Old Lady).
Currency exchanges exist in countries with economies in transition. Their functions include the exchange of currencies for businesses and adjustment of exchange rates in the market. In this case the state regulates the exchange rate, using the small size of the exchange market.
Foreign exchange brokers act as intermediaries between buyers and sellers of foreign currency, and also carry out conversion or deposit and loan transactions between them. Currency brokers take a commission for their services, a percentage of the total transaction amount.
Individuals perform a wide range of non-trading operations, including travelling abroad, transfers of fees, salaries and pensions, and also the purchase and sale of foreign currency. Thanks to the introduction of trading in 1986, individuals received the opportunity to invest free funds in the Forex currency market in order to obtain additional profit.