How the $7 Trillion Currency Market ACTUALLY Works

0:00 There's a market bigger than stocks, bigger than bonds, bigger than crypto, and most people have no idea how it works. It can make oil more expensive overnight. It can wipe billions off company profits. It can make your holiday more expensive, your investments more volatile, and entire countries richer, poorer, safer, or more vulnerable. It's the currency market, also known as the foreign exchange market or [music] FX. This is a market where money itself is bought and sold, and it's worth more than 7 trillion dollars per day. So, what does it mean to trade currencies? Imagine you're going on holiday from the UK to the United States. You have pounds, but America

0:46 uses dollars. So, we exchange pounds for dollars. Let's say 1 pound equals 1.25 dollars. If you exchange 1,000 pounds, you get 1,250 dollars. But, a few weeks later, 1 pound equals 1.1 dollars. Suddenly, your pound buys fewer dollars. So, your holiday becomes more expensive. Nothing about America changed. The only thing that changed was the price of money. That's currency movement. Currencies are always moving against each other. And when people trade currencies, they're buying one currency and selling another at the same time. That's why currencies are quoted in pairs. You don't just buy the pound, [music] you buy the pound against

1:32 something else. For example, GBP/USD is the British pound against the US dollar. If GBP/USD is trading at 1.25, 1 pound buys 1.25 dollars. If GBP/USD goes up, the pound is getting stronger against the dollar. If GBP/USD goes down, the pound is getting weaker. You're not just asking about another currency, will this currency go up? You're asking, will this currency go up relative to another currency? [snorts] That's what makes currencies different from stocks. When you trade currencies, you're comparing economies. Currencies are like a scoreboard for countries. They reflect interest rates,

2:19 inflation growth trade debt politics confidence fear [music] and sometimes complete panic. So, what makes a currency go up or down? The most important factor is interest rates. If the US is offering interest rates of 5% while the UK is offering 3%, >> [music] >> where would a large global investor rather park their cash? All else being equal, they'd rather hold dollars because dollars pay higher return. So, investors buy dollars. Demand rises. And when demand for currency rises, its value usually rises, too. This is why currencies are so closely tied to central banks. [music]

3:05 When a central bank raises rates, its currency often strengthens. But, markets don't just care about what central banks are doing now, they care about what they're expected to do [music] next. If everybody already expects the Federal Reserve to raise rates, the dollar might not move much when it happens because the market has already priced it in. If inflation comes in higher than expected and investors think the Fed may need to raise rates even more, then the dollar could strengthen quickly. Markets move based on the gap between expectations and reality. The next big factors are inflation, growth, and trade. Inflation means prices are rising. If 10 pounds used to buy a basket of groceries,

3:50 but today that same basket cost 20 pounds, your pounds have lost value. A currency is only valuable if people trust that it will hold its value over time. If inflation gets too high, people may move into stronger currencies, pushing the weaker currency down even further. Growth matters, too. If a country's economy is strong, investors usually want to buy its assets. To buy those assets, they usually need that country's currency. Trade matters, as well. If a country exports more than it imports, foreign buyers need its currency. That can support the currency. But if money is constantly flowing out of the country, that can weaken it. For around 80 years, the main safe haven

4:38 currency has been the US dollar. The dollar is the world's reserve currency. It's the main currency countries, businesses, and investors use to trade [music] and settle debts around the world. Global trade is heavily linked to dollars. Oil is usually priced in dollars. A huge amounts of global debt is in dollars. And central banks hold large dollar reserves. So, when the world panics, investors often want dollars. Not because America is perfect, but because the dollar has historically been deep, liquid, and trusted. But reserve currencies don't last forever. Throughout history, the dominant currency has usually belonged to the dominant power.

5:23 First, it was currencies like the Dutch guilder, then the British pound. After the Second World War, the US dollar took over. This gives America a huge advantage, because if the rest of the world wants your money, you can borrow more cheaply and run larger deficits. But over time, trust can weaken. Other countries may start asking, "Is this money still as safe as it used to be?" The dollar is still dominant, but some countries are trading more in their own currencies. Central banks are buying more gold, and some governments are uncomfortable with America's power over the dollar-based financial system. This is why currencies tell you so much about the world. They don't just show you what investors think about interest rates.

6:10 They show you what investors think about trust. When you trade currencies, you will hear terms like pip, spread, leverage, and margin. A pip is a tiny unit of price movement. The spread is the difference between the buy price and the sell price. But, the most dangerous term is leverage. Leverage means borrowing money to control a larger portion than your actual capital. If you have a thousand pounds and use 30 to one leverage, you can control a 30,000 pound position. That sounds exciting because small moves can create large gains, but it also means small moves can create large losses. >> [music] >> This is why so many beginners get

6:56 destroyed trading currencies. They're not wrong because they think currencies will move. They're wrong because they use too much leverage. So, how do people make money trading currencies? The first way is directional trading. You believe one currency will rise or fall against another. The second way is the carry trade. Borrowing in a low interest rate currency and investing in a higher interest rate currency. The third way is hedging. Investors or businesses use currencies to reduce risk. Often by locking in exchange rates to protect profits. So, should beginners trade currencies? Honestly, most beginners probably shouldn't start with short-term FX

7:43 trading. Not because currencies aren't important, but because FX trading is brutally competitive. You're trading against banks, hedge funds algorithms institutions [music] and professionals. That said, regular investors can access currencies through online trading platforms and brokers >> [music] >> using products like Forex accounts, CFDs, spread betting accounts, or sometimes currency ETFs. The basic idea is simple. Choose a currency pair, decide whether you think it will rise or fall, and place a trade. Currency is the hidden layer underneath investing. The stock market tells you what investors think about companies. The bond market tells

8:30 you what investors think about interest rates and debt. But the currency market tells you what investors think about entire countries. And once you understand that, you'll start seeing the financial world completely differently. If you're interested in finance and economics, but you always found the lingo unnecessarily complicated, we've made a financial jargon cheat sheet for you. So, you'll never have to wonder what these overly complex financial terms mean again. It's completely free, and you can download it from the link in the description below. Thanks for watching. See you on the next one.