A foreign exchange (FX) transaction is a transaction which allows funds to flow between bank deposits denominated in different currencies.
Last available figures from the Bank for International Settlements (BIS) show that on an average day, over $1 trillion changed hands in the 24 hour global FX marketplace.
Surprisingly, only about 15% of FX is directly driven by cross-border trade in goods and services. Approximately 85% is driven by capital transactions conducted by banks for financial engineering and speculation.
Each sovereign state issues and manages its own currency through a national central bank. The exception is the eurozone. This new currency area is made up of 12 European Member States. A politically independent European Central Bank issues and manages the trans-national currency, the euro.
The euro should not be confused with eurocurrencies, which are currencies held in deposits outside their national banking system.
For example, dollars held in the account of a German bank are known as eurodollars, yen held in the account of a London bank - and as an asset of the London bank - are known as euroyen, and so on.
In the markets, currency names are shortened to 3 letters to meet the needs of screen-based tables. These were developed by the International Organisation for Standardisation and are called ISO codes or SWIFT codes. We use these conventions throughout.
The currencies in purple are the legacy national currency units (NCUs) which now represent localised denominations of a single currency, the euro. They are tradeable as NCUs until 1.01.2002 when the euro will become the sole denomination.
NCU exchange rates will still be displayed against other currencies whilst markets are being made; but interbank fund flows are predominantly in euro because pricing, trading and settlement in all EMU money, debt and equity markets are now denominated solely in euro.