The following is a breakdown of the character of the forex market and its effects on the economy.
Key Sectors of the Market
In any given economy, the two sectors in the forex market are the retail sector and institutional sector. The retail sector is basically made up of individual small-scale traders. This market has no major impacts on the economy. The institutional market, however, has some key effects on the economy. This sector is composed of all the big financial players that shape the economy. Big institutions are responsible for lending and thus influence businesses in the economy. The economy depends on the demand and supply forces at the institutional level to thrive. While there is no direct influence of this market to the economy, the ramifications of trading in the market can be felt in the economy.
The Purpose of Trading
The forex market is solely responsible for facilitating international trade. Currency exchange enables institutions to do business beyond the borders of the nation. Just like in any other market, a strong currency has more value and is able to dominate in the international trading market. The activities of traders in the forex market also influence its prosperity. When there is an uncertainty in the market, speculators in the forex market cause price adjustments.
This, in turn, affects the profit margins of the traders.
Long-Term Effects of Forex on the Economy
Forex trading affects the economy in both the short-term and long-term. Economic activity determines the demand for a particular currency, which in turn has an effect on the value of the currency. If the currency has a constant demand due to increased tourism or increased earnings from manufactured goods, then the economy is bound to grow. Sometimes, adjustments in the short-term become necessary especially when the demand has been dormant for a long time. Countries that have consistently focused on adding value to their goods attract good revenues in the forex market. In overall, the forces of demand ultimately determine the forex market’s performance and thus the economy as a whole.
Forex and International Trade
As reported by bestonlineforexbroker.com, international trade highly influences forex rates. The demand for a particular currency in the forex market determines the benefits a particular nation gets from forex trading. When two nations trade, they must agree on a particular currency of exchange. The currency chosen for exchange attracts an increase in demand and thus translates to an increase in revenue for the traders involved in its exchange. Strong nations whose currencies are high in demand thus get a lot of revenue from the forex market.