By enabling currency conversion, the foreign exchange market plays crucial role in assisting international trade and investment. As a result of this, the foreign exchange market is the largest, most liquid asset class in the world.
Globally dispersed, and operating 24hrs a day, except on weekends. The volume traded is massive, with an average daily turnover in global foreign exchange markets of just under USD $4 Trillion, there are no other markets sizewise to even compare it to.
In a standard foreign currency exchange transaction, one party buys a quantity of one currency by paying with a quantity of another currency.
The free floating exchange rate market we experience today was established in the 1970's under the Bretton Woods Agreement. The agreement created a system and set of rules for commercial and financial relations between all major industrialized countries.
Prior to its establishment most industrialized countries had very closed exchange rate regimes in place. As trade between countries has increased over the last 30-40 years, most countries have gradually switched to the free floating exchange market system we currently enjoy.
The forex market, like stock and bond markets, have different instruments that vary in terms of their actual liquidity. As a rule of thumb, the most economically and politically stable countries have the most in demand currencies, making them the most liquid. The largest industrialized economies in the world, the United States, Japan, Great Britain, France, Germany, Italy, and Canada, collectively known as the G7 are the most relevant, in terms of overall activity.
Since the unification of many European currencies into the Euro, the currencies that are the most liquid in today’s market include; the US Dollar, the Japanese Yen, the British Pound, the Euro, and the Canadian Dollar. Most estimates put the level of activity in these currencies at more than 80% of daily foreign exchange volume.