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Markets - Foreign exchange marketExplanationThe Bank of England is an active participant in the foreign exchange market. As the banker to the government they are also responsible for managing the UK's foreign exchange reserves, and this is one reason for their participation. They could also intervene to try to influence the level of the exchange rate, though this has rarely been done in recent years. London is perhaps the premier international centre for foreign exchange trading and the market in foreign exchange is a big one. The market has a net daily turnover in London of over $650 billion. That's a lot of money! One reason for this is the fortunate position we occupy in the centre of the world's time zones. From London traders can trade with Europe during the day, and also with Asia and the USA at the beginning and end of each day. The foreign exchange market trades 24 hours a day, and though the most active period for the banks is during our day, most will also be watching the markets carefully right through the night. The volume of foreign exchange traded has fallen since the early 1990s. This is partly due to the fact that perhaps 95% of trading is for speculative reasons and the introduction of the euro has reduced opportunities for speculation. However, another factor is that governments are no longer using the exchange rate as a target (as was the case in the late 1980s), and this has also reduced some of the potential for speculation. For more detail on what determines the exchange rate, and other theories associated with it, see the exchange rate theory section. |
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