The Forex market, also known as FX, is the currency exchange marketplace. With over $1.4 trillion in daily turnover, the FX market is the largest market in the world. A truly global exchange, the FX market operates 24 hours a day. The trading day starts in Sydney and rotates around the world as the business day begins at each financial center. The FX market is an "over the counter" market as there is no physical exchange floor. Instead, trades are facilitated between parties via electronic network or over the telephone.

A majority of those involved with the FX market are speculators. They place trades with the sole intention of making a profit. Speculators are highly valuable to the market as they generate liquidity and hence price stability. But, speculators are not the entire market. Government treasuries can play a significant role in the market with limited action.

Despite its size there are no regulatory agencies governing the currency market. There aren't any institutions responsible for setting exchange rules. However, central banks and governments can intervene if the market becomes unstable. But not every government interaction is designed to restore stability to the market. Instead, they try to influence the market's value of their currency.

The U.S. Treasury in the FX Market

The U.S. Treasury Department is responsible for managing the U.S. government's foreign currency holdings. When the treasury determines to intervene in the market they will work closely with the Federal Reserve. In fact, the Federal Reserve Bank of New York acts as the treasury's agent in the FX market.

Upon instruction, the Federal Reserve Bank of New York will take actions to strengthen or weaken the dollar. To strengthen the dollar the bank will buy dollars and sell foreign currencies. To weaken the dollar it will sell dollars and buy foreign currency. These transactions are minimal when compared to the size of the market and do not have an effect on supply and demand. However, the bank attempts to affect the behavior of investors through its actions.

The Treasury Department has only intervened in the FX market twice since 1995. Direct action is not the only tool US monetary agencies have at their disposal to influence currency markets. The manipulation of interest rates can have an effect on the value of a currency. A country with high interest rates may see its currency value rise as foreign investors buy to invest at higher rates.