What is the foreign exchange market and why is it important?

Foreign exchange rates as of 9:20 am EST, 1 July 2023

Currency pair	Federal Reserve (1)	x-rates.com	OANDA
EUR/USD	1.0887	1.0904	1.0884
GBP/USD	1.2701	1.2689	1.2662
AUD/USD	0.6687	0.6660	0.6639
NZD/USD	0.6149	0.6138	0.6105
CHF/USD	1.1137	1.1166	1.1140
JPY/USD	0.0070	0.0069	0.0069

1. These rates are average rates compiled by the Federal Reserve System as of 23 June 2023. 

What is the foreign exchange market?

Financial media website Investopedia defines the foreign exchange market as:

” … an over-the-counter (OTC) global marketplace that determines the exchange rate for currencies around the world. Participants in these markets can buy, sell, exchange, and speculate on the relative exchange rates of various currency pairs.

Foreign exchange markets are made up of banks, forex dealers, commercial companies, central banks, investment management firms, hedge funds, retail forex dealers, and investors.”

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Foreign exchange markets are important since they are an access point for the necessary liquidity that supports trade. If an American investor wants to invest overseas, the investor will need to convert her dollars into foreign currency. Whether the investor wants to purchase real property in London or invest in British gilts, she would need to buy British pounds to do so.

The foreign exchange markets are highly unregulated. The high degree of deregulation stems from public policy. As the U.S. Supreme Court explained in Dunn v. Commodity Futures Trading Commission, the off-exchange currency markets developed privately for decades prior to attempts at market regulation.

The Court also noted the public policy argument that there is a risk that a market made up of sophisticated traders, investors, and banks could move offshore if subjected to greater regulation, but the Court also noted that it should be up to Congress to address this question.

Alton Drew

1 July 2023

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