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Compared to commodity markets, money markets move a lot. My guess is that commodity markets are less elastic due to fixed production costs. But I don't know if that is the correct explanation.

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  • $\begingroup$ Site note: money is a commodity too. Its value can increase or decrease. It plays by supply and demand rules. Just for some reason it's a commodity in which other commodities' value is expressed but it is definitely a commodity itself. $\endgroup$ – matcheek Jul 11 '15 at 22:12
  • $\begingroup$ @matcheek Indeed, my initial statement was poorly worded. I meant why does it seem to fluctuate more than other commodities. $\endgroup$ – Pablo Derbez Jul 11 '15 at 22:20
  • $\begingroup$ Over what time horizon? Are you talking short-term volatility, or longer-term trend variation? And do you mean secured or unsecured funding markets, or both? $\endgroup$ – dismalscience Jul 12 '15 at 17:17
  • $\begingroup$ @dismalscience Short time horizon, both $\endgroup$ – Pablo Derbez Jul 13 '15 at 3:37
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    $\begingroup$ @user5174 The main distinction between a regular commodity and FOREX product is that a regular commodity is purchased to be consumed whereas a FOREX product is purchased for speculation. $\endgroup$ – AnilB Jul 20 '15 at 15:34
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The first reason for which volatility is higher is the liquidity of currencies. It has no storage or transportation costs. It can be used to purchase goods or traded again without additional costs. It doesn't age as fast as some commodities (agricultural products don't last forever). Therefore, the volume of trade is very high, and market participants can very easily enter or exit the market.

Forex is extremely suitable for speculation: money relates to a lot of political decisions, macroeconomic trends and many other driver that are easily and publicly available. Therefore it might be easier to small private traders to trade currencies than firms, which require deeper knowledge. It is indeed easier to read a standard newspaper than to read an earning call transcript.

Moreover, Forex market's design also favor volatility: currencies trade 24/24, not 9 to 5. That means more people have access to it at any point in time. Another critical point is that there is a gigantic quantity of derivatives based on currencies. They can be used both for speculative purposes (thus generating leverage and increase the potential upside of the bet), or to generate protection against currency movements.

All these elements contribute to make foreign exchange markets more volatile than commodities'.

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