DEFINITION of International Currency Markets
The International Currency Market is a market in which participants from around the world buy and sell different currencies. Participants include banks, corporations, central banks, investment management firms, hedge funds, retail forex brokers and investors.
Forex Market Basics
BREAKING DOWN International Currency Markets
The International Currency Market is the largest financial market in the world, with an average daily trading volume of $5 trillion. In this market, transactions do not occur on a single exchange, but in a global computer network of large banks and brokers from around the world.
The currency market, or foreign exchange market ("forex"), was created to facilitate the exchange of currency that becomes necessary as the result of foreign trade. That is, when an entity in one country sells something to an entity in another country, the seller earns that foreign currency. When China sells t-shirts to Walmart, for example, China earns US dollars. When Toyota wants to build a factory in the US, it needs dollars. It may get those from its local bank, which in turn will obtain them in the international currency market. This market exists to facilitate these types of exchanges.
Sometimes corporations enter the forex market in order to hedge their profits. A US company with extensive operations in Mexico, for example, may enter into a futures contracts on US dollars. So, when it comes time to bring those Mexican profits home, the profits earned in pesos will not be subject to unexpected currency fluctuations. The futures contract is a way of securing an exchange rate and eliminating the risk that peso will lose value versus the dollar, making those profits worth less in dollars.
The forex market differs from the stock market in that it does not involve a clearinghouse. Transactions occur directly between parties without an intermediary to ensure that each party complies with its obligations.
Currencies do not come with a single price but are priced in terms of other currencies. A US dollar, for example, may be worth 18 Mexican pesos, 0.81 euros, 105 Japanese yen, 1.3 Canadian dollars or 1,194 Iraqi dinars.
Governments may seek to influence the value of their currencies, sometimes to help increase their exports. A country's central bank may enter the market to sell the country's currency, helping to push the value down. Sometimes a country that does this may be labeled a "currency manipulator."