Loading the player...

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.

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."

RELATED TERMS
  1. Managed Currency

    A managed currency is one whose monetary exchange rate is affected ...
  2. MXN

    In the currency market, this is the abbreviation for the Mexican ...
  3. Currency ETF

    Currency ETFs (exchange-traded funds) aim to replicate movements ...
  4. Forex Market

    The forex market is the market in which participants including ...
  5. Dollar Rate

    The dollar rate is the exchange rate of a currency against the ...
  6. Online Currency Exchange

    The currency exchange is an online system for exchanging one ...
Related Articles
  1. Trading

    Forex trading: A beginner's guide

    Learn about the forex market and some trading strategies to get started.
  2. Investing

    Currency Positions You Can Take Now

    The foreign currency market is the largest financial market in the world, and investors in this market have many options.
  3. Investing

    Protect your foreign investments from currency risk

    Hedging against currency risk can add a level of safety to your offshore investments.
  4. Investing

    Currency futures: An introduction

    The forex market is not the only way for investors and traders to participate in foreign exchange.
  5. Investing

    5 Ways To Invest In Currencies

    As the economies of some countries sputter and former third-world countries are beginning to emerge, currency investing is becoming more intriguing. Learn ways to make money on money with the ...
  6. Trading

    Top 5 Hardest-Hit Currencies

    The value of a country's currency is dependent on many factors that will cause it to fluctuate, relative to other world currencies.
  7. Trading

    Forex Trading: A Beginner’s Guide

    As businesses continue to expand to markets all over the globe, the need to complete transactions in other countries’ currencies is only going to grow.
RELATED FAQS
  1. What is foreign exchange?

    Foreign exchange is the conversion of a country's currency into another. In a free economy, a country's currency is valued ... Read Answer >>
  2. How do you make money trading money?

    Trading money, particularly in the forex market, is a speculative risk, as you are betting that the value of a currency will ... Read Answer >>
  3. What am I buying and selling in the forex market?

    The forex market is the largest market in the world. According to the Triennial Central Bank Survey conducted by the Bank ... Read Answer >>
  4. How does the balance of payments impact currency exchange rates?

    Take a brief look at the relationship between a nation's balance of payments and the exchange rate value of its currency ... Read Answer >>
  5. How can I trade in cross currency pairs if my forex account is denominated in U.S. ...

    The forex market allows individuals to trade on nearly all of the currencies in the world. However, most of the trading is ... Read Answer >>
Hot Definitions
  1. Inflation

    Inflation is the rate at which prices for goods and services is rising and the worth of currency is dropping.
  2. Discount Rate

    Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
  3. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  4. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  5. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  6. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
Trading Center