Meaning:
The concept of foreign exchange market corresponds to that of the market for a commodity or a factor of production.
It is a market in which national currencies are bought and sold against each other by individuals, firms, institutions, and authorities, and which provides an institutional arrangement for international flow of capital funds.
Geographically, foreign exchange market is spread over several locations around the world, which are therefore referred to as international monetary (or financial) centres. It, of course, is possible that the currency of a particular country may not be traded in all these centres.
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Growth:
Over the last few decades foreign exchange market has grown at an exponential rate. Each day, hundreds of billions of dollars are traded in these centres. Several factors, including the following, have contributed to this phenomenal growth of foreign exchange market:
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1. A rapid expansion in international trade and capital flows.
2. Development of fast, reliable and cost-effective means of communication and information facilitating financial transactions.
3. Relaxation of controls on foreign financial transactions.
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4. Growing sensitivity of the market to changes (both actual and expected) in exchange rates of important currencies.
5. Development of international clearing facilities resulting in minimising of actual remittance of currencies.
6. Increasing popularity of a few leading currencies as ‘vehicle’ currencies, that is, their use in financing international economic transactions and for holding foreign exchange reserves.
7. Voluminous increase in “footloose” funds floating around the world in search of better safety and returns. Their movement between countries and between currencies is mostly independent of trade and business investment activities
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8. Increasing volume of speculative transactions.