What Is Forex?

What Is Forex?

Forex is where one currency is exchanged for another, the US dollar for the euro, the yen for the pound, and so on. Prices are quoted in pairs, because a currency only has value relative to another. It is enormous and always moving: trillions of dollars change hands every day, around the clock on weekdays, traded not on a single central exchange but across a global, decentralised network of banks, companies, governments and traders.

Currency Pairs and How They Work

Every forex price is a pair, written with two three-letter codes like EUR/USD or USD/JPY. The first currency is the "base" and the second is the "quote", and the price tells you how much of the quote currency it takes to buy one unit of the base. So EUR/USD at 1.10 means one euro costs 1.10 dollars. Trading forex means betting on how that ratio will change: if you think the dollar will strengthen against the euro, you sell EUR/USD. The most heavily traded pairs, the "majors", all involve the US dollar against another big currency, like the euro, yen, pound or Swiss franc, and they have the deepest liquidity and tightest costs. Because it is always a comparison, you are never just buying a currency, you are buying one and selling another at the same time.

Why Forex Is the Biggest Market

Forex dwarfs every other market, with daily turnover measured in trillions of dollars, far more than all the world’s stock markets combined. The reason is that currency is the plumbing of the entire global economy: every international trade, cross-border investment, tourist purchase and corporate transaction ultimately requires swapping one currency for another. A company importing goods, a fund buying foreign stocks, a traveller exchanging money, all of them touch the forex market. That constant, worldwide demand, layered on top of speculation by banks and traders, is what makes it the largest and most liquid market on Earth, and why it runs continuously as trading follows the sun from one financial centre to the next.

What Moves Currencies?

A currency’s value reflects the relative strength and attractiveness of its economy, captured by a few key forces.

• Interest rates: higher rates tend to attract money to a currency, since investors earn more holding it. See interest rates.
• Growth and inflation: a strong, stable economy tends to support its currency; high inflation tends to erode it.
• Central bank policy: decisions and signals from the likes of the Federal Reserve move currencies sharply.
• Risk mood: in fear, money flows to safe currencies like the US dollar; in greed, to riskier, higher-yielding ones.

How Does Forex Reflect the Global Mood?

Currencies are a real-time vote on risk. When the world turns fearful, money rushes into safe-haven currencies, the US dollar, the Japanese yen, the Swiss franc, and they strengthen; when confidence returns, the same money fans out into riskier, higher-yielding currencies and assets. So a currency chart is, in part, a risk-on or risk-off gauge, and a strengthening dollar in particular is often a sign that global fear is rising. CFGI does not score currencies directly, but it measures the very same fear and greed in the two markets it covers, crypto and equities, on the Fear and Greed Index. When forex flashes risk-off and the Fear and Greed Index plunges together, it is the same global mood showing up in different markets.