Who Participates in the Forex?
There are three principle reasons that bring traders and investors into the Forex.
The first is the exchanging of currencies by entities that need other currencies to purchase goods and services in a currency other than their own. Also to convert foreign profits into the entities home country’s currency. For example, when Exxon buys oil from Russian suppliers, they may be required to pay in Euros. They will have to convert US dollars into Euros. When IBM sells a computer to a Japanese company and is paid in yen, they must convert that to US dollars, IBM’s home currency.
The second is corporate "hedging" whereby financial managers hedge against unwanted risk associated with future price fluctuations in the currency market. If 40% General Motors overseas business is in Euro dollars, it would be wise for GM to hedge its sales in Us dollars to prevent loses that will occur with currency fluctuations. If a hedge fund is invested 50% in European stocks, they will hedge in currencies for the same reason.
The third is currency speculation for profit. Traders, large and small, buy and sell contracts hoping to make a profit off the future movement of the currency rates. Over 90% of the currency market is speculative driven.
Governments will also participate in the Forex market to influence the value of their currencies, either by selling large amounts of their domestic currency in order to lower the rate, or buy to raise the price. While large players can influence the market in the short term, the sheer size and volume of the Forex market makes it almost impossible to manipulate long term.