The foreign exchange department is responsible for dealing with and managing the purchase and sale of foreign currencies and is a highly specialized business. All banks, private or state owned, have foreign exchange departments that work closely with the foreign exchange markets in each country trading with other financial centers worldwide. The greatest share of currency trading is specific to a banks own account although a small proportion will be on behalf of its personal customers.
The foreign exchange department performs the transfer of money from one currency to another, such as US dollars to the euro. Travelers that have taken a vacation overseas are familiar with the foreign exchange desk at a bank or at airports but these transactions form a small part of daily currency trading.
The main function of a foreign exchange department is to make money for the bank by speculating on whether a particular currency will rise or fall against another. Banks compete fiercely with each other using experienced market traders and millions of dollars or currency equivalents are exchanged daily.
Each bank has direct links to the main foreign exchange market in the country via dedicated phone lines and computers. The departments contain an array of screens providing constantly updated statistical and analytical data. Complex programs attempt to predict the future movement of currencies and instant decisions, as to whether to buy or sell a currency, can result in a bank making or losing substantial sums in seconds.
Foreign exchange departments are different depending on whether banks are part of the private sector or the public sector.
Foreign exchange departments of banks in the public sector, often referred to as the central bank, have a different focus to those in the private sector. The prime objective is ensure external trade and to maintain sufficient currency reserves. A central bank controls the amount of currency available, and implements monetary policy. In some countries central banks set the exchange rate of its currency against another.
A central banks foreign exchange department attempts to maintain a status quo and will purchase its own currency to stabilize it.
The emphasis for a foreign exchange department in the private banking sector is to make money whether for its own account or for customers. Most of the daily currency trades are in the private sector and the global foreign exchange market is the largest participant of all commodity markets in terms of trading volume.
According to the 2009 Euromoney FX poll, Deutsche Bank of Germany was the top currency trader followed by UBS AG of Switzerland and Barclays Capital of the U.K. Close behind were Citibank in the U.S. Foreign currency trading is particularly used by pension funds and hedge funds.
Foreign currency trading takes place between all currencies and countries but by far the most traded currency in the world is the U.S. dollar.
Beside the private and public banks there are other participants in the market including commercial companies, investment companies and foreign exchange brokers.
These organizations perform an essential role in the continuous movement of global money.