Central banks hold large currency reserves of their domestic currency as well as that of important trading partners. Moreover, central banks efforts to manage domestic economic performance by monetary policy, including raising or lowering short-term interest rates, has immediate and powerful effects on currency prices.
Global FX Banks
A small number of global banks sit atop the FX market paradigm. These banks deal with central banks, major corporations and fund managers. These banks provide pricing on large FX trades as well as economic and market commentary and expertise on executing and clearing trades in major and emerging market currencies around the world.
Companies that do business internationally are important foreign exchange market participants. For example, if Atlanta-based Coca Cola were to sell a product in the United Kingdom they trade pounds for dollars in the FX market to repatriate it back to the United States.
Across the board, fund managers are active foreign exchange traders. They access the market to acquire foreign currencies required to fund cross-border investments. For example, the purchase of shares in Tokyo requires a US-based investment manager to have the correct sum of Japanese yen in an account in order to settle the stock transaction. Depending on their FX market view, the fund manager might seek to hedge the currency risk that comes with holding an overseas investment. The manager would enter into a swap or forward FX trade to lock in the current USD/JPY rate into the future. Some fund managers, especially hedge funds, are also very active speculators in the foreign exchange markets.
Retail traders are individuals who trade their own money in order to make a profit. Retail traders make up a significant and fast growing proportion of the FX market.