Non-economists are repeatedly surprised to find out that the foreign exchange market is by far the largest financial market worldwide. Daily trade in the global FOREX and related markets currently is over 3.2 trillion U.S. dollars. No other market comes close to this sum in trading volume. Source: ceoworld.biz

It functions like any market: Buyers and sellers of a commodity gather and trade. In the foreign exchange market, as in any market, a currency whose demand exceeds supply will see its value go up, and vice versa.

The environment of the commodity involved in the foreign exchange is though one distinction between foreign exchange and other markets. In most markets, goods or services are exchanged for cash. Prices are quoted as units of the transactions medium (money) per unit of the commodity. But In foreign exchange, yet, one type of money is exchanged for another (e.g., Yen for U.S. dollars). Even so, it is probable to draw a precise analogy among currency markets and others. In every currency market, one currency is treated as the commodity, and the other currency is treated as the transactions medium.

For example, in the U.S dollar–British Pound market, dollars are the commodity, and British Pound is the transactions medium; as a result, prices are quoted as yen per U.S dollar. The U.S. dollar is occupied in the gigantic majority (80%) of currency transactions as either the transactions medium or the commodity currency. The euro is involved in 30% of transactions, the Japanese yen in 24%. In a third tier of importance, the pound sterling is involved in 13% of transactions, the Swiss franc in 6%, and the Canadian and Australian dollars in about 4% each. The U.S dollar is traded so repeatedly because it is the market’s vehicle currency, which means that it is involved in almost any exchange from one non-dollar currency into another.

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