Why is the foreign exchange market important?

The foreign exchange market is the largest and most liquid financial market globally (according to the latest BIS survey, the average daily trading volume exceeds USD 9.6 trillion). Its proper functioning is essential for international trade, cross-border investment, and economic stability, as it facilitates the exchange of currencies among companies, governments, central banks, and investors. Discover how it works and why its influence is so significant.

What Is the Foreign Exchange Market (Forex) and How Does It Work?

The foreign exchange market, also known as the Foreign Exchange Market or Forex, is a largely decentralized market where the world’s currencies are traded. Its main function is to facilitate the exchange of one currency for another, thereby determining exchange rates. This market is vital to the global economy for several reasons:

International trade: it allows companies operating in different countries to convert their revenues and payments into their local currency.

Foreign investment: an investor wishing to purchase shares in a foreign company must first acquire that company’s local currency, an operation carried out in the Forex market.

Risk management: companies and investors use Forex to protect themselves against adverse exchange rate fluctuations (hedging).

Key factors influencing exchange rates

Exchange rates are dynamic and fluctuate constantly due to a combination of macroeconomic and geopolitical factors. The most influential are:

Interest rates: central banks, such as the U.S. Federal Reserve (Fed) or the European Central Bank (ECB), set interest rates, which have a direct impact on the strength of their currencies.

Economic data: indicators such as Gross Domestic Product (GDP), employment figures, retail sales, and industrial production reflect the health of an economy and, therefore, the value of its currency.

Political and geopolitical stability: political uncertainty generates risk aversion, leading investors to seek “safe-haven currencies” such as the U.S. dollar, the Japanese yen, or the Swiss franc.

Trade balance: a country with a trade surplus (exporting more than it imports) generally experiences higher demand for its currency, leading to appreciation.

Inflation, which measures the rate at which the general price level of goods and services rises, also has a direct and crucial relationship with exchange rates. Generally, a country with consistently lower inflation experiences an appreciation of its currency, as its purchasing power increases relative to other currencies. Conversely, a country with high inflation tends to see its currency depreciate.

Who can operate in the foreign exchange market?

The foreign exchange market is accessible to a wide range of participants, each with different objectives:

Global banks and investment banks: the largest players, forming the interbank market where the highest volumes of currency trading take place.

Central banks: intervene to manage their country’s foreign exchange reserves, control the money supply, and influence exchange rates.

Supranational institutions (IMF, BIS, etc.): with mandates for supervision, market analysis, and investment support, they participate in the Forex market.

Sovereign wealth funds: public investment funds that invest in foreign-currency assets, mainly funded by revenues from natural resources (oil, gas).

Multinational corporations: conduct currency transactions to pay suppliers, receive payments from foreign customers, and manage currency risk.

Investment funds and hedge funds: speculate on exchange rate movements to generate returns for their clients.

Retail investors (retail traders): thanks to online trading platforms, individuals can speculate on currency fluctuations, although this activity carries high risk.

Who controls the foreign exchange market?

One of the defining characteristics of the Forex market is that it is largely decentralized or non-centralized. There is no single exchange or entity that controls it, unlike the stock market (an organized market). Transactions are carried out “over the counter” (OTC), meaning directly between two parties through various electronic and non-electronic channels, with electronic platforms being the most relevant today.

However, central banks are among the most influential players. Although they do not control the market, their monetary policy decisions and direct interventions through buying or selling currencies can have a massive impact.

In the global Forex market, not all of the world’s currencies are freely tradable, as they are divided into three categories:

Major pairs: the most liquid and widely traded. They include the U.S. dollar (USD) paired with seven other major currencies: the euro (EUR), Japanese yen (JPY), British pound (GBP), Swiss franc (CHF), Canadian dollar (CAD), Australian dollar (AUD), and New Zealand dollar (NZD).

Minor pairs or crosses: pairs that do not include the U.S. dollar but consist of other major currencies (e.g., EUR/GBP or AUD/JPY).

Exotic pairs: include one major currency paired with the currency of an emerging or smaller economy.

Some currencies, known as non-convertible currencies, cannot be traded in the global market due to government restrictions.

BBVA CIB and leadership in the foreign exchange market

This leadership has been recognized by leading international institutions including Global Finance, which named BBVA the World’s Best FX Bank for Corporate Clients, as well as by the Euromoney Foreign Exchange Awards 2025, where the bank received seven awards across different categories and strategic geographies.