Foreign exchange is the exchange or conversion of one national currency into another. This is done at a “spot” exchange rate, specifying that one unit of one currency is worth a certain number of units of another currency. Currencies are traded on a global foreign exchange market virtually around-the-clock. Foreign exchange is often abbreviated as “forex” or “FX.”
Foreign exchange transactions happen on small and large scale transactions. If you’ve exchanged money at the airport while traveling or wired money to another country, you probably dealt with exchange rates. Those rates were set in the forex markets. Governments and large corporations also have to consider foreign exchange rates in paying for goods and services. When a country’s currency is relatively weak compared to the dollar or other currencies, its exports can be priced more cheaply and may attract more buyers. A strong currency can sometimes hurt exporters, because they have to raise prices. Since some commodities, like oil, are priced mostly in US dollars, their price can be affected by changes in exchange rates, along with supply and demand.
Globalization has increased foreign exchange transactions in recent decades. Because of this, the forex markets are the largest in the world and involve banks, commercial companies, central banks, investment management firms, hedge funds, and retail forex brokers and investors. Because the currency markets are large and liquid, they are believed to be the most efficient financial markets. It is important to realize that the foreign exchange market is not a single exchange, but is constructed of a decentralized network of computers that connects participants around the world.« Back to Glossary Index