Lesson 4: How Big Is the Forex Market?

You’ve learned in the previous lessons that the forex market is the world’s largest market by volume size. It had a daily trading volume rate of almost $7.5 trillion in April 2022—nearly a trillion dollars more than the 6.6 trillion 2019 average. 

While going from six to seven may not seem like much, talking about it in trillions means an additional 900 million more daily trades for three years. 

Facilitating such a high daily trade volume can be too much for any institution. Fortunately, the forex market does not operate based on a single central exchange or confined to any given physical location. 

Instead, brokers, banks, and other financial institutions worldwide act as third-party platforms enabling forex trading. This means you only need an internet connection to participate in the forex market. 

Because it runs entirely electronically, traders consider the forex market an over-the-counter (OTC) market. 

Lesson Highlights 

• The forex market’s daily average trading volume is almost $7.5 trillion as of 2022. 
• There are eight major currencies but only seven major currency pairs. 
• Pairing the U.S. dollar with another major currency will give you a major currency pair. Pairing two major currencies will result in a minor currency pair if neither of those currencies is the U.S. dollar. 
• Emerging economies' currencies are considered exotic and are often less liquid than major and minor currency pairs. 
• The U.S. dollar is the world’s most-traded currency.
• Besides being the world’s largest market by volume size, the forex market is also the most liquid.

Which Currencies Dominate the Forex Market? 

The forex market offers trading in a wide range of currencies. The number of currency pairs you can select is the same as the number of recognized currencies worldwide. 

You can choose whether to trade only in major currency pairs, minor currency pairs, or mix them up. You can determine whether a currency pair is major, minor, or exotic (a major currency paired with an emerging economy currency) based on the specific currencies you use as your base and quote currencies. 

There are currently eight major currencies in the forex, representing some of the world’s strongest economies. These currencies include: 

• The U.S. dollar (USD) 
• The euro (EUR) 
• The British pound (GBP) 
• The Japanese yen (JPY) 
• The Canadian dollar (CAD) 
• The Australian dollar (AUD) 
• The Swiss franc (CHF) 
• The New Zealand dollar (NZD) 

For currency pairs to be considered major in the forex market, one of the two currencies must be the USD and another of the remaining seven major currencies. 

These pairs can either be: 

As you can see, there can only be seven major currency pairs despite having eight major currencies. 

Currencies not paired with the U.S. dollar are considered minor currencies, and their pairings are minor currency pairs. These pairs have wider spreads and less liquidity than their major counterparts. However, minor currency pairs are still relatively liquid. 

Below are examples of minor currency pairings. 

Lastly, pairs that involve a major and an emerging economy’s currency are considered exotic currencies (e.g., USD/KRW or the U.S. dollar vs. The South Korean won). 

Presently, over 100 countries are considered developing; however, exotic currency trading mainly revolves around 18 currencies. 

These currencies include: 

• Brazilian real 
• Czech koruna 
• Chinese yuan renminbi 
• Indonesian rupiah 
• Indian rupee 
• Hong Kong dollar 
• South Korean won 
• South African rand 
• Thai baht 

Although over 170 available currencies are currently used in forex trading, some currencies are more popular and dominate the market. 

These currencies’ popularity is often due to their high liquidity and the economic stability of their backing governments. This means you can trade them more efficiently, and their prices are less volatile than other currencies. 

In the 2022 BIS Triennial Survey, the U.S. dollar was still the most traded currency in the forex market and was present in 88% of all trades in April of the same year. It was followed by the euro, yen, and the pound sterling, respectively. The Chinese yuan became the fifth most-traded currency—higher than its eight-place rank in 2019. 

How the U.S. dollar Became the Dominant Forex Currency

You can trace the reason behind the U.S. dollar’s dominance in the forex market back to the years preceding the end of World War II. 

Time for a short history lesson! 

During the 1944 Bretton Woods Conference, 44 Allied countries, including the US and the UK, ratified the creation of the World Bank and the International Monetary Fund. The governing exchange rate systems were likewise created, and the voting countries pegged their currencies to the U.S. dollar instead of gold. During that time, the U.S. dollar was still convertible to gold at a fixed rate of $35 per ounce. 

However, the US eventually shorted itself out of enough gold to cover the U.S. dollars circulating outside the country. After failed attempts to salvage the Bretton Woods system, then-U.S. President Nixon suspended the U.S. dollar’s gold convertibility in August 1971. 

Thanks to the Bretton Woods Agreement, most of the world’s economies post–WW2 accumulated U.S. dollars rather than gold. Demand for U.S. Treasury securities also simultaneously rose as countries looked for a way to store their supply of U.S. dollars safely. 

Fast-forward to 2020, the U.S. currency comprises 59 percent of the world’s forex reserves. Although this figure is a decline from the previous 62% in 2019, it’s still the majority of the world’s foreign currency reserves. This solidifies the significant role of USD in the financial market, especially in the foreign exchange market.

Is the forex market liquid? 

Liquidity refers to how easily you can convert a given asset to cash without compromising its market value. 

Thus, the more liquid an asset is, the faster you can turn it into cash, which is universally regarded as the most liquid asset. In contrast, converting fewer liquid assets into cash will take more time. 

For instance, you can easily convert currencies and commodities, such as gold, into cash. Meanwhile, assets such as real estate and antique collections will take longer unless you compromise their prices. 

Because forex markets deal with currencies, finding buyers willing to meet your asking price is relatively easy. 

Moreover, the forex market’s 24-hour day, five-days-a-week, and decentralized operation allow it to facilitate trades from virtually anywhere with an internet connection worldwide. This ensures you’ll never be at a want of an active exchange. 

It is for these reasons—accessible, decentralized, and no shortage of available buyers—that the forex market is widely recognized as the world’s most liquid market. 

In the next lesson, you’ll learn about the part of the forex market you may be most looking forward to—how to trade in it.