FOREX-Dollar slips against euro, oil, GSE worries weigh

TOKYO, Aug 28 (Reuters) - The dollar slipped from a six-month high against the euro on Thursday after comments by a European Central Bank official the previous day scaled back speculation about an ECB rate cut.


ECB Executive Board member Axel Weber, widely considered one of the most influential ECB policy-makers, told Bloomberg News that any talk about lower interest rates in the euro zone was premature.


A rise in oil prices also supported the euro while the dollar remained weighed down by troubles in the U.S. financial system, due to uncertainty over how housing finance firms Fannie Mae and Freddie Mac will be bailed out of the current crisis.


The euro's recovery helped limit yen gains against other currencies and kept the dollar in narrow ranges against the Japanese currency.


"Weber's comments were hawkish and the market now appears to be looking for reasons to push the euro higher, with an eye on upcoming euro zone data," said Hiroshi Yoshida, a trader at Shinkin Central Bank.


German unemployment data is due later in the day and euro zone consumer price data is due on Friday.


"Oil prices holding up is also positive for the euro, suggesting the euro may start to recover from recent selling," Yoshida said.


Market players barely reacted to a Japanese newspaper report which said the United States, Europe and Japan had planned to intervene and rescue a weak dollar in March. [ID:nN27489995]


Japan's top financial diplomat, Naoyuki Shinohara, said on Thursday he had no comment on the report and said there was no change in Japan's foreign exchange policy. [ID:nTKU003023]


Traders in Tokyo said the news itself will likely have little impact because conditions have changed and the dollar has rebounded significantly since then. But the report may stir expectations of intervention in the future if exchange rates reach extreme levels.


The euro was up 0.3 percent at $1.4763 , recovering from a six-month low at $1.4570 hit on Tuesday.


The dollar eased 0.1 percent versus the yen to 109.40 yen .


The dollar also fell against a basket of six major currencies, retreating from this year's highs.


The dollar index, a measure of the greenback's value against six major currencies, fell 0.2 percent to 76.860 <.DXY>, having hit a 2008 high on Tuesday at 77.619.


Despite U.S. economic weakness, the dollar had been benefiting from growing signs since late July that economic weakness has spread beyond the Unites States.


With a deteriorating global economy, central banks in Britain and Australia are expected to lower rates at some point to help shield their economies from the threat of recession, while the Federal Reserve is widely seen holding rates steady for months.


A slew of weak euro zone economic data this week had fuelled expectations that the ECB's next move would be to cut rates, but with such views dimming after Weber, the dollar's advantage may also weaken, traders said.

Best Forex Trading Book

Book Description The first plain-English introduction to foreign currency exchange trading--one of today's hottest profit opportunities The foreign currency market is the largest financial market in the world, and foreign exchange trading is quickly becoming one of today's most high-profile, potentially ...

"For many investors, an intense, 24-hour-a-day, $1.5 trillion roller-coaster of a market spells "danger"; for readers of Forex Revolution, the word is "opportunity." —Michael J. Panzner, vice president, Rabo Securities USA, Inc., and author of The New Laws of the Stock

Bill Williams' pioneering application of chaos theory to the financial markets is leading technical analysis into the twenty-first century and beyond. New Trading Dimensions presents a complete, highly original, and intriguing trading method with clear, detailed illustrations, and challenging practice pages. Bill's wisdom, technical expertise, and skillful teaching style make this a revolutionary must-have new book for stock and commodity traders." —Tom Bierovic, Product Manager for User Education, Omega Research, Inc.o

How do margin calls work?

A margin call is generated when the equity balance in an account drops below the margin requirement for that size account. If the maximum allowable leverage has been exceeded, any open positions are immediately liquidated, regardless of the nature or size of the positions.

How often can trades be made?

As one might expect, trading activity on any particular day is dictated by current market conditions. Some small to medium size traders might make as many as 10 transactions in a day. By not charging commission and offering tight spreads, Forex Capital Management investors can take positions as often as is necessary without concern for excessive transaction costs.

How long should a position be maintained?

Forex traders generally hold positions until one of three criteria is met:
1. A sufficient profit has been realized from the position.
2. A pre-set stop-loss order is triggered.
3. A better potential position emerges and the trader needs to liquidate funds to take advantage of it.

What trading strategy should I use?

Both economic fundamentals and technical factors influence the decisions of currency traders. Those who follow economic fundamentals use government issued reports, current news, and broad economic trends to anticipate movements in price. Technical traders rely on trend lines, support and resistance levels, and a variety of charts and mathematical analysis to identify trading opportunities. Over time, the most significant price movements occur in close association with unexpected events. Perhaps the central bank changes rates without warning, or an election puts an unexpected candidate in power. News from conflicts certainly impacts currency pricing. More often than not, it is the expectation of a certain event rather than the actual event that drives price pressures.

How can I manage risk?

The most common risk management tools in Forex trading are the stop-loss order and the limit order. The stop-loss order directs that a position be automatically liquidated at a certain price in order to guard against dramatic changes against the position. A limit order sets the maximum price that the investor is willing to pay in a transaction, as well as a minimum price to be received in exchange. The foreign exchange marketplace is so liquid that it is easy to execute stop-loss and limit orders. Forex Capital Management guarantees execution of stop-loss and limit orders at the specified price on orders up to US$1 million.

How is pricing determined for certain currencies?

The full range of economic and political conditions impact currency pricing. It is generally held that interest rates, inflation rates and political stability are top among important factors. At times, governments participate in the forex market in order to influence the traded value of their currencies. These and other market factors such as very large orders can cause extreme relative volatility in currency prices. The sheer size of the forex market prevents any single factor from dominating the market for any length of time.

What is the difference between an "intraday" and "overnight position"?

Intraday positions are all positions opened anytime during the 24 hour period AFTER the close of Forex Capital’s normal trading hours at 5:00pm EST. Overnight positions are positions that are still on at the end of normal trading hours (5:00pm EST), which are automatically rolled by Forex Capital Management.

What are “short” and “long” positions?

Short positions are taken when a trader sells currency in anticipation of a downturn in price. Making this move allows the investor to benefit from a decline. Long positions are taken when a trader buys a currency at a low price in anticipation of selling it later for more. Making these moves allows the investor to benefit from changing market prices. Remember! Since currencies are traded in pairs, every forex position inevitably requires the investor to go short in one currency and long in the other.

What is Margin?

Margin is a performance bond that insures against trading losses. Margin requirements in the FX marketplace allow you to hold positions much larger than the asset value of your account. Trading with Forex Capital Management includes a pre-trade check for margin availability, the trade is executed only if there are sufficient margin funds in your account. The Forex Capital Management trading system calculates cash on hand necessary to cover current positions, and provides this information to you in real time. If funds in your account fall below margin requirements, the system will close all open positions. This prevents your account from falling below your available equity, which is a key protection in this volatile, fast moving marketplace.

Is is capital intensive to trade forex?

Forex Capital Management requires a minimum deposit of $300 to open a Mini Account and $2000 for a regular account. Your relationship with Forex Capital Management enables you to conduct highly leveraged trades (as much as a 200 to 1 leverage ration in the Mini Account.) You set the degree of leverage that you wish to deploy. Unless otherwise specified, your leverage level is set at the most lenient level required by your account size. Please remember that while this degree of leverage enables you to maximize your profit potential, there is an equally great potential for loss.

Who participates in the FX market?

Central, commercial and investment banks have traditionally dominated the Forex market. Other market participation is rapidly increasing, and now includes international money managers and brokers, multinational corporations, registered dealers, options and futures traders, and private investors.

What are the most common currencies in the Forex markets?

The most “liquid” currencies in the Forex market are those of countries with low inflation, stable governments, and respected central banks. Nearly 85% of daily transactions involve the major currencies, including the U.S. Dollar, Japanese Yen, the European Union Euro, British Pound, Swiss Franc, and the Canadian and Australian Dollars.

When is the FX market open for trading?

Forex is a true global 24-hour marketplace. The trading day begins in Sydney, and moves around the globe as each financial center comes to life. Tokyo follows, then London, and finally New York. Investors can respond in real time to any fluctuations caused by current economic, social and political events.

Is there a central location for the Forex Market?

Forex trading is not managed through an exchange. Since transactions are conducted between two counterparts, the FX market is an “inter-bank,” or over the counter (OTC) market.

What is Foreign Exchange / Forex / FX?

Foreign exchange is the simultaneous purchase of one currency and sale of another – currencies are always traded in pairs. International currencies are traded on floating exchange rates. There is a daily average turnover of about US$1.5 trillion in the foreign exchange markets. The foreign exchange market is known as the "Forex," or "FX" market. It is the largest financial market in the world.

Forex Software

Forex trading software helps investors working in the sometimes complicated area of foreign exchange transactions and should be looked at by all serious investors.

Using the older methods of reading hard copy newsletters, magazines and books worked well during its day and age, but today decisions need to be made quickly, and having access to up to date information and the ability to make a trade quickly is something that forex trading software offers the investor and it greatly increases the ability of an investor trader to work the market resulting in profit.

For the investor who is interested in acquiring forex trading software there are many good options. Checking with a financial advisor you trust to see what forex trading software he or she recommends can be a good place to start. Also going online and doing a web search of forex trading software can show many programs available.

Many people when going online will log onto message forums or join online groups that discuss forex trading and see what other traders like to use. Simply posting a message on the group asking what forex trading software is poplar and what the advantages and disadvantages of each program are can add to a person’s knowledge base and allow him or her to make a good decision when purchasing forex trading software.

Remember also that some specific forex trading software programs are available for short free trial periods. Experimenting with several programs will help an investor make a decision as to which forex trading software will offer the options and ease of use desired. This try it before you buy it approach will help a person avoid decisions that might be regretted later

.If, as an investor, you are using one of the many reliable online trading systems, the company that you are working through may have forex trading software they can furnish you. Often this is available for quick and easy download to your home computer and is already set up for optimum operation with the system with which you are working.

If your company does not provide forex trading software they probably have programs that they can recommend, that they and their members have had good luck with in the past. Always ask what forex trading software they recommend before making a purchase.Since the companies that manufacture and market forex trading software are competing for your business their advertisements and websites will list many of the positive features of their product.

They often offer free e-books or free e-zines that provide information on forex trading. If a company is able to provide you with this information take a close and serious look at what they are offering. Consider this a part of your forex trading education, and learn from it. Use it as a way to add to your personal knowledge base and you’ll benefit.

Remember that the many choices of forex trading software are there because individuals involved in forex trading have different needs and different preferences, so learning all you can about a program, and about the forex trading market itself before buying will always pay off.

WHAT IS FOREX CURRENCY TRADING?

If you read about investing, you've seen the word forex trading. But because forex doesn't get much publicity in the major publications and websites, many investors don't know that forex is just short for "foreign exchange". So trading the forex market is simply trading foreign currencies.

As recently as ten years ago, currency trading had high barriers to entry, so only large banking and institutional firms had access to the tools and systems required to play in the forex trading game. Recently, however, technology has developed to the point that any individual investor can hop right in and trade with one of the many online platforms.

When buying and selling in the forex currency trading system market, you'll see that there are four "currency pairs" that dominate the percentage of trades. Those four are the Euro vs U.S. Dollar, US Dollar vs Japanese Yen, US Dollar vs Swiss Franc, and US Dollar vs British Pound.

he goal when investing in currency is to be holding a currency that appreciates in value in relation to the other currencies. To use an overly simplistic example, if you bought 50 British Pounds for 100 US Dollars, held the Pounds for 1 week, and in that period the value of Pounds increased in relation to US Dollars, you could then convert those Pounds back into dollars for, say, $120.

Unlike the domestic stock markets, the forex currency trading is open for trades 24 hours a day. Much like the phrase "it's always noon somewhere," it's always business hours at some region of the globe. Since every country trades on the FX market, and it's open all day, the daily volume is roughly $1.2 trillion, which dwarfs that of the NYSE. Another comparison to make in order to truly realize the magnitude of the forex market is with the currency futures market (which has around 1% of the daily volume).

One other important distinction to make is that forex currency trading is not centered on an exchange like the NYSE or NASDAQ. There is no central body or organization required to act as middleman. Trading circulates between major banking centers around the world.

Until recently, there were strict financial requirements and massive minimum transaction sizes which prevented individual investors from trading. But with the advent of the internet came the FX brokers. A forex currency broker is similar to an online stock trading account such as etrade.

Anybody can open an account and buy and sell in any quantity. Because the brokers have thousands of investors placing orders through them, they are able to meet the large minimum transaction size by purchasing in large blocks and distributing currency amongst the purchasing investors.

Although it is now easy to start trading forex, it is a complicated and complex market. While it offers fantastic opportunity for wealth, it is also very easy to lose your shirt in a hurry. Before trading forex, do your homework and read as much as you can find before investing your hard earned money.

British Pound Speculative Shorts (COT) Highest on Record

According to the most recent COT numbers, US dollar bullish sentiment is at an extreme, which makes the buck vulnerable to a sharp decline in the weeks ahead. Notably, the difference between speculative and commercial positions for the British Pound is the greatest it has ever been. This is the kind of dynamic we would expect to see at a turning point.

Latest CFTC Release Dated August 19, 2008:



Discuss Trader Sentiment and Positioning at the DailyFX Forum

08-25-08cot1

The COT Index is the percentile of the difference between net speculative positioning and net commercial positioning measured over a specific number of weeks (either 52 or 13). A reading close to 0 suggests that a bottom is forming and a reading close to 100 suggests that a top is forming. The readings are for the actual currency, not the currency pair. For example, a reading of 100 on the Canadian Dollar suggests that the Canadian Dollar is close to a top (USDCAD close to a bottom).



Readings of 95 and higher as well as 5 and lower are in boldfaced red type to indicate potential market extremes. For example, an increasing index is bullish until the index is extreme (near 100), at which time the risk of a reversal or pause in the trend increases.

US Economic Indicators: DJ Survey Of Forecasters-Aug 25

Forecasts based on the projections from 20 economists as of Friday,
Aug 22. NA = not available. E = estimate. R = revised. **** = tentative.


Time --Forecast--
Date EDT Indicators Median Low High Prev Actual
08/25 :1000: Jul Existing Home Sales : 4.92 4.80 5.00: 4.85R: 5.00
08/25 :1000: % change : : -2.8R: 3.1
08/26 :1000: Jul S/F Home Sales : 520 500 540: 530 :
08/26 :1000: Aug Consumer Confidence : 53.5 52.0 55.0: 51.9 :
08/26 :1000: Jul Preliminary Steel Impo: NA NA NA : 9.1% :
08/27 :0830: Jul Durable Goods (% chg) : -0.4 -1.0 0.3: 0.8 :
08/28 :0830: Unemploy Clms p/e Aug 23 : 420 325 430: 432 :
08/28 :0830: Q2 Pre GDP : 2.7 2.5 3.0: 1.9
08/28 :0830: Final Sales Dom Prchsr : NA NA NA : 5.0 :
08/28 :0830: PCE Defltr : 0.3 0.2 0.3: 1.5 :
08/28 :0830: Price Defltr : NA NA NA : 1.1 :
08/28 :0830: Q2 Pre Corp Profits : : 2.5 :
08/29 :0830: Jul Personal Inc (% chg) : -0.4 -1.0 0.1: 0.1 :
08/29 :0830: PCE (% chg) : 0.2 0.2 0.3: 0.6 :
09/02 :1000: Aug ISM : NA NA NA : 50.0 :
09/02 :1000: Employment : : 51.9 :
09/02 :1000: Prices : NA NA NA : 88.5 :
09/02 :1000: Jul Constrcn Spdg(% chg) : NA NA NA : -0.4 :
09/03 :1000: Jul Factory Ord (% chg) : NA NA NA : 1.7 :
09/04 :0830: Q2 Fin Productivity : NA NA NA : 2.3 :
09/04 :0830: Unit Labor Costs : NA NA NA : 1.5 :
09/05 :0830: Aug Jobless Rate : NA NA NA : 5.7 :
09/05 :0830: Jobs (chg) : NA NA NA : -51 :
09/05 :0830: Private (chg) : : -76 :
09/05 :0830: Manufac (chg) : NA NA NA : -35 :
09/05 :0830: Avg Hourly (% chg) : NA NA NA : 0.3 :
09/08 :1500: Jul Consumr Crdt (bln$) : NA NA NA : 14.3 :
09/11 :0830: Jul Trade Balance : NA NA NA : -56.8 :
09/11 :0830: Goods Total : NA NA NA : -70.0 :
09/11 :1400: Aug Treasury Budget Stmt : NA NA NA : -102.8 :
09/12 :0830: Aug Retail Sales (% chg) : NA NA NA : -0.1 :
09/12 :0830: Ex-Auto (% chg) : NA NA NA : 0.4 :
09/12 :0830: Aug PPI (% chg) : NA NA NA : 1.2 :
09/12 :0830: PPI Core (% chg) : NA NA NA : 0.7 :
09/12 :1000: Jul Busin Invty (% chg) : NA NA NA : 0.7 :
09/15 :0915: Aug Industl Prod (% chg) : NA NA NA : 0.2 :
09/15 :0915: Capacty Util : NA NA NA : 79.9 :
09/16 :0830: Aug CPI (% chg) : NA NA NA : 0.8 :
09/16 :0830: CPI Core (% chg) : NA NA NA : 0.3 :
09/17 :0830: Aug Housing Starts : NA NA NA : 0.965 :
09/17 :0830: % change : : -11.0 :
09/17 :0830: Housing Permits : NA NA NA : 0.937 :
09/17 :0830: % change : : -17.7 :
09/18 :1000: Aug LEI (% chg) : NA NA NA : -0.7 :
10/31 :0830: Q3 07 ECI : NA NA NA : 0.7 :
10/31 :0830: ECI Annual : NA NA NA : 3.1 :
-By Rodney Christian; Dow Jones Newswires; 202-646-1880;
csstat@dowjones.com
Related fixed stories:
84698 US Economic Indicators: Latest 6 months data
80055-57 US Economic Calendar

US ECONOMIC INDICATORS: Housing Data, Latest 6 Months

Data seasonally adjusted except actual, which is not seasonaly adjusted.
Median and average prices for existing and single family homes in dollars.
Housing construction and homes sold in 1,000 units. R = revised.
(*) data reflect the increase in the universe of permits-issuing places
from 19,000 to 20,000 places. tbr = To Be Released.

HOUSING CONSTRUCTIO Jul Jun May Apr Mar Feb
Housing Starts 1,066 : 1,066R: 977R: 1,004 : 988 : 1,107
% change 0.0 : 9.1R: -2.7R: 1.6 : -10.7 : 4.0
Actual (NSA) 99.7 : 99.7R: 91.2R: 89.5 : 82.2 : 78.4
% change 0.0 : 9.3R: 1.9R: 8.9 : 4.8 : 10.7
Permits Issued(*) 1,138 : 1,138 : 978 : 982 : 932 : 981
% change 0.0 : 16.4 : -0.4 : 5.4 : -5.0 : -6.7
Actual (NSA) 108.1 : 108.1 : 90.3 : 89.5 : 77.4 : 73.4
% change 0.0 : 19.7 : 0.9 : 15.6 : 5.4 : -3.3
Units Completed 1,167 : 1,167R: 1,153R: 1,033 : 1,192 : 1,251
% change 0.0 : 1.2R: 11.6R: -13.3 : -4.7 : -6.0
Actual (NSA) 102.3 : 102.3R: 96.8R: 79.6 : 89.8 : 87.0
% change 0.0 : 5.7R: 21.6R: -11.4 : 3.2 : -7.0
Under Constr 965 : 965R: 983R: 1,006 : 1,013 : 1,024
% change 0.0 : -1.8R: -2.3R: -0.7 : -1.1 : -1.0
Actual (NSA) 977.8 : 977.8R: 990.3R: 999.9 : 988.6 : 989.6
% change 0.0 : -1.3R: -1.0R: 1.1 : -0.1 : -1.3

EXISTING HOME SALES Jul Jun May Apr Mar Feb
Total Homes Sold 5,000 : 4,850R: 4,990 : 4,890 : 4,940 : 5,030
% change 3.1 : -2.8R: 2.0 : -1.0 : -1.8 : 2.9
Median Prices 212.4 : 215.1R: 207.9 : 201.2 : 200.1 : 195.6
Average Prices 254.0 : 257.9R: 252.6 : 247.2 : 247.1 : 242.0
S/F Homes Sold 4,390 : 4,260R: 4,410 : 4,340 : 4,360 : 4,470
% change 3.1 : -3.4R: 1.6 : -0.5 : -2.5 : 2.8
Median Prices 210.9 : 213.6R: 206.0 : 199.6 : 197.6 : 193.6
Average Prices 252.9 : 256.8R: 251.2 : 246.2 : 245.4 : 240.7

NEW S/F HOMES Jul Jun May Apr Mar Feb
Homes Sold tbr : 530 : 533R: 542R: 513R: 572
% change tbr : -0.6 : -1.7R: 5.7R: -10.3R: -4.2
Actual (NSA) tbr : 49 : 51R: 49R: 49R: 48
% change tbr : -3.9 : 4.1R: 0.0R: 2.1R: 9.1
Median Prices tbr : 230.9 : 227.7R: 243.4R: 229.3R: 245.3
Average Prices tbr : 298.6 : 298.9R: 314.1R: 287.6R: 301.2

FHLB Jul Jun May Apr Mar Feb
Avg Arm Rate tbr : 6.23 : 6.04 : 5.97 : 6.03 : 5.87
-By Rodney Christian; Dow Jones Newswires; 202-646-1880;
csstat@dowjones.com
Related fixed story numbers:
84697 US ECONOMIC INDICATORS: FWN Survey of Forecasters (STATS)
84698 US ECONOMIC INDICATORS: Latest 6 months (STATS)
80055-57 US MONTHLY ECONOMIC CALENDAR

USD Mixed Following Upbeat Data

The greenback was mixed at the start of a holiday-shortened week, with the UK market closed in observance of the summer bank holiday today – relinquishing earlier session gains above the 110-level against the yen and easing from the 1.47-handle versus the euro. The US economic data released this morning saw a higher than expected increase in July existing home sales, which reversed the 2.6% decline in June, increasing by 3.1% to 5.0 million units.

Traders will also digest several key reports slated for release on Tuesday, including the S&P/Case-Shiller home price index, the Conference Board’s August consumer confidence survey, July new home sales and the Richmond Fed manufacturing survey. The June Case-Shiller 20mm home price index is seen declining by 0.8% from -0.9%, while the 20-yy is expected to decline by 16.2% from a 15.8% fall previously. The Conference Board’s August consumer confidence survey is seen improving to 53.0, up from 51.9 in July. Meanwhile, new home sales for July are expected to remain steady, unchanged from June at 530k units.

Factors affecting currency trading

Although exchange rates are affected by many factors, in the end, currency prices are a result of supply and demand forces. The world's currency markets can be viewed as a huge melting pot: in a large and ever-changing mix of current events, supply and demand factors are constantly shifting, and the price of one currency in relation to another shifts accordingly. No other market encompasses (and distills) as much of what is going on in the world at any given time as foreign exchange.

Supply and demand for any given currency, and thus its value, are not influenced by any single element, but rather by several. These elements generally fall into three categories: economic factors, political conditions and market psychology.



Economic factors
These include economic policy, disseminated by government agencies and central banks, economic conditions, generally revealed through economic reports, and other economic indicators.

Economic policy comprises government fiscal policy (budget/spending practices) and monetary policy (the means by which a government's central bank influences the supply and "cost" of money, which is reflected by the level of interest rates).

Economic conditions include:

Government budget deficits or surpluses: The market usually reacts negatively to widening government budget deficits, and positively to narrowing budget deficits. The impact is reflected in the value of a country's currency.

Balance of trade levels and trends: The trade flow between countries illustrates the demand for goods and services, which in turn indicates demand for a country's currency to conduct trade. Surpluses and deficits in trade of goods and services reflect the competitiveness of a nation's economy. For example, trade deficits may have a negative impact on a nation's currency.

Inflation levels and trends: Typically, a currency will lose value if there is a high level of inflation in the country or if inflation levels are perceived to be rising. This is because inflation erodes purchasing power, thus demand, for that particular currency. However, a currency may sometimes strengthen when inflation rises because of expectations that the central bank will raise short-term interest rates to combat rising inflation.

Economic growth and health: Reports such as gross domestic product (GDP), employment levels, retail sales, capacity utilization and others, detail the levels of a country's economic growth and health. Generally, the more healthy and robust a country's economy, the better its currency will perform, and the more demand for it there will be.


Political conditions
Internal, regional, and international political conditions and events can have a profound effect on currency markets.

For instance, political upheaval and instability can have a negative impact on a nation's economy. The rise of a political faction that is perceived to be fiscally responsible can have the opposite effect. Also, events in one country in a region may spur positive or negative interest in a neighboring country and, in the process, affect its currency.


Market psychology
Market psychology and trader perceptions influence the foreign exchange market in a variety of ways:

Flights to quality: Unsettling international events can lead to a "flight to quality," with investors seeking a "safe haven". There will be a greater demand, thus a higher price, for currencies perceived as stronger over their relatively weaker counterparts. The Swiss franc has been a traditional safe haven during times of political or economic uncertainty.[8]

Long-term trends: Currency markets often move in visible long-term trends. Although currencies do not have an annual growing season like physical commodities, business cycles do make themselves felt. Cycle analysis looks at longer-term price trends that may rise from economic or political trends. [9]

"Buy the rumor, sell the fact:" This market truism can apply to many currency situations. It is the tendency for the price of a currency to reflect the impact of a particular action before it occurs and, when the anticipated event comes to pass, react in exactly the opposite direction. This may also be referred to as a market being "oversold" or "overbought".[10] To buy the rumor or sell the fact can also be an example of the cognitive bias known as anchoring, when investors focus too much on the relevance of outside events to currency prices.

Economic numbers: While economic numbers can certainly reflect economic policy, some reports and numbers take on a talisman-like effect: the number itself becomes important to market psychology and may have an immediate impact on short-term market moves. "What to watch" can change over time. In recent years, for example, money supply, employment, trade balance figures and inflation numbers have all taken turns in the spotlight.

Technical trading considerations: As in other markets, the accumulated price movements in a currency pair such as EUR/USD can form apparent patterns that traders may attempt to use. Many traders study price charts in order to identify such patterns.

Trading characteristics

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 aspires 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.

There is little or no 'inside information' in the foreign exchange markets. Exchange rate fluctuations are usually caused by actual monetary flows as well as by expectations of changes in monetary flows caused by changes in GDP growth, inflation, interest rates, 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.

Currencies are traded against one another. Each pair of currencies thus constitutes an individual product and is traditionally noted XXX/YYY, where YYY is the ISO 4217 international three-letter code of the currency into which the price of one unit of XXX is expressed (called base currency). For instance, EUR/USD is the price of the euro expressed in US dollars, as in 1 euro = 1.5465 dollar. Out of convention, the first currency in the pair, the base currency, was the stronger currency at the creation of the pair. The second currency, counter currency, was the weaker currency at the creation of the pair.

Retail forex brokers

There are two types of retail brokers offering the opportunity for speculative trading. Retail forex brokers or Market makers. Retail traders (individuals) are a small fraction of this market and may only participate indirectly through brokers or banks. Retail forex brokers, while largely controlled and regulated by the CFTC and NFA might be subject to forex scams[5] [6]. At present, the NFA and CFTC are imposing stricter requirements, particularly in relation to the amount of Net Capitalization required of its members. As a result many of the smaller, and perhaps questionable brokers are now gone. It is not widely understood that retail brokers and market makers typically trade against their clients and frequently take the other side of their trades. This can often create a potential conflict of interest and give rise to some of the unpleasant experiences some traders have had. A move toward NDD(No Dealing Desk), And STP(Straight Through Processing) has helped to resolve some of these concerns and restore trader confidence, but caution is still advised in ensuring that all is as it is presented.

Non-bank foreign exchange companies offer currency exchange and international payments to private individuals and companies. These are also known as Foreign Exchange Brokers but are distinct from Forex Brokers as they do not offer speculative trading but currency exchange with payments. i.e. there is usually a physical delivery of currency to a bank account.

It is estimated that in the UK, 14% of currency transfers/payments are made via Foreign Exchange Companies[7]. These companies' selling point is usually that they will offer better exchange rates or cheaper payments than the customer's bank. These companies differ from Money Transfer/Remittance Companies in that they generally offer higher-value services.

Money Transfer/Remittance Companies perform high-volume low-value transfers generally by economic migrants back to their home country. In 2007, the Aite Group estimated that there were $369 billion of remittances (an increase of 8% on the previous year). The four largest markets (India, China, Mexico and the Philippines) receive $95 billion. The largest and best known provider is Western Union with 345,000 agents globally.

Banks & Commercial companies

The interbank market caters for both the majority of commercial turnover and large amounts of speculative trading every day. A large bank may trade billions of dollars daily. Some of this trading is undertaken on behalf of customers, but much is conducted by proprietary desks, trading for the bank's own account.

Until recently, foreign exchange brokers did large amounts of business, facilitating interbank trading and matching anonymous counterparts for small fees. Today, however, much of this business has moved on to more efficient electronic systems. The broker squawk box lets traders listen in on ongoing interbank trading and is heard in most trading rooms, but turnover is noticeably smaller than just a few years ago.

An important part of this market comes from the financial activities of companies seeking foreign exchange to pay for goods or services. Commercial companies often trade fairly small amounts compared to those of banks or speculators, and their trades often have little short term impact on market rates. Nevertheless, trade flows are an important factor in the long-term direction of a currency's exchange rate. Some multinational companies can have an unpredictable impact when very large positions are covered due to exposures that are not widely known by other market participants.

National central banks play an important role in the foreign exchange markets. They try to control the money supply, inflation, and/or interest rates and often have official or unofficial target rates for their currencies. They can use their often substantial foreign exchange reserves to stabilize the market. Milton Friedman argued that the best stabilization strategy would be for central banks to buy when the exchange rate is too low, and to sell when the rate is too high — that is, to trade for a profit based on their more precise information. Nevertheless, the effectiveness of central bank "stabilizing speculation" is doubtful because central banks do not go bankrupt if they make large losses, like other traders would, and there is no convincing evidence that they do make a profit trading.

The mere expectation or rumor of central bank intervention might be enough to stabilize a currency, but aggressive intervention might be used several times each year in countries with a dirty float currency regime. Central banks do not always achieve their objectives. The combined resources of the market can easily overwhelm any central bank.[4] Several scenarios of this nature were seen in the 1992–93 ERM collapse, and in more recent times in Southeast Asia.

Market participants

Unlike a stock market, where all participants have access to the same prices, the forex market is divided into levels of access. At the top is the inter-bank market, which is made up of the largest investment banking firms. Within the inter-bank market, spreads, which are the difference between the bid and ask prices, are razor sharp and usually unavailable, and not known to players outside the inner circle. As you descend the levels of access, the difference between the bid and ask prices widens (from 0-1 pip to 1-2 pips for some currencies such as the EUR). This is due to volume. If a trader can guarantee large numbers of transactions for large amounts, they can demand a smaller difference between the bid and ask price, which is referred to as a better spread. The levels of access that make up the forex market are determined by the size of the “line” (the amount of money with which they are trading). The top-tier inter-bank market accounts for 53% of all transactions. After that there are usually smaller investment banks, followed by large multi-national corporations (which need to hedge risk and pay employees in different countries), large hedge funds, and even some of the retail forex market makers. According to Galati and Melvin, “Pension funds, insurance companies, mutual funds, and other institutional investors have played an increasingly important role in financial markets in general, and in FX markets in particular, since the early 2000s.” (2004) In addition, he notes, “Hedge funds have grown markedly over the 2001–2004 period in terms of both number and overall size” Central banks also participate in the forex market to align currencies to their economic needs.

Market size and liquidity

The foreign exchange market is unique because of

its trading volumes,
the extreme liquidity of the market,
the large number of, and variety of, traders in the market,
its geographical dispersion,
its long trading hours: 24 hours a day except on weekends (from 3pm EST on Sunday until 4pm EST Friday),
the variety of factors that affect exchange rates.
the low margins of profit compared with other markets of fixed income (but profits can be high due to very large trading volumes)
the use of leverage

Main foreign exchange market turnover, 1988 - 2007, measured in billions of USD.As such, it has been referred to as the market closest to the ideal perfect competition, notwithstanding market manipulation by central banks. According to the BIS,[1] average daily turnover in global foreign exchange markets is estimated at $3.98 trillion. Trading in the world's main financial markets accounted for $3.21 trillion of this.

This $3.21 trillion in main foreign exchange market turnover was broken down as follows:

$1.005 trillion in spot transactions
$362 billion in outright forwards
$1.714 trillion in forex swaps
$129 billion estimated gaps in reporting
Of the $3.98 trillion daily global turnover, trading in London accounted for around $1.36 trillion, or 34.1% of the total, making London by far the global center for foreign exchange. In second and third places respectively, trading in New York accounted for 16.6%, and Tokyo accounted for 6.0%.

In addition to "traditional" turnover, $2.1 trillion was traded in derivatives.

Exchange-traded forex futures contracts were introduced in 1972 at the Chicago Mercantile Exchange and are actively traded relative to most other futures contracts. Forex futures volume has grown rapidly in recent years, and accounts for about 7% of the total foreign exchange market volume, according to The Wall Street Journal Europe

The foreign exchange

The foreign exchange (currency or forex or FX) market exists wherever one currency is traded for another. It is the largest and most liquid financial market in the world, and includes trading between large banks, central banks, currency speculators, multinational corporations, governments, and other financial markets and institutions. The average daily trade in the global forex and related markets is continously growing and was last reported to be over US$ 4 trillion in April 2007 by the Bank for International Settlement