How Did the Foreign Exchange Market Emerge?

The foreign exchange (forex) market emerged because residents who acquire foreign currency typically seek to convert it into their domestic currency for local operations and consumption, while those with foreign-denominated debts need to exchange domestic currency for foreign currency. How can these parties swap their holdings? One solution is direct negotiation between end-users of forex for transactions.

For example, a U.S. exporter receiving £10,000 may need to convert it to USD, while a U.S. importer must pay £10,000. Direct negotiation allows both to fulfill their needs.

Today, there are over 30 major forex markets globally, spanning continents. Traditionally categorized by region:

• Europe: London, Frankfurt, Zurich, Paris

• North America: New York, Los Angeles

• Asia-Pacific: Sydney, Tokyo, Singapore, Hong Kong

Each market has unique traits but shares commonalities. Though separated by distance and time, they interact sensitively while operating independently. Orders from one closing market often set the tone for the next opening market. These hubs radiate influence to surrounding regions.

Operating hours overlap across time zones, linked by advanced communication networks. Participants trade seamlessly worldwide, with minimal exchange rate disparities, creating a unified, 24/7 global forex market.

Tokyo Forex Market
Tokyo is Asia’s largest forex hub. Pre-1960s, Japan imposed strict financial controls. After joining the IMF in 1964, the yen became freely convertible, and Tokyo’s market gradually formed. Post-1980s, Japan’s economic boom and trade prominence expanded its forex market. Since the 1990s, post-bubble stagnation led to subdued trading.

USD/JPY dominates Tokyo’s market. As a trade powerhouse, Japanese importers/exporters significantly impact exchange rates. The Bank of Japan frequently intervenes due to the yen’s sensitivity to trade conditions—a defining feature of Tokyo’s forex market.