The
foreign exchange market (
forex,
FX, or
currency market) is a worldwide decentralized
over-the-counter financial market for the trading of currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends. The foreign exchange market determines the relative values of different currencies.
[1]
The primary purpose of the foreign exchange is to assist international trade and investment, by allowing businesses to convert one currency to another currency. For example, it permits a US business to import British goods and pay
Pound Sterling, even though the business's income is in
US dollars. It also supports speculation, and facilitates the
carry trade, in which investors borrow low-yielding currencies and lend (invest in) high-yielding currencies, and which (it has been claimed) may lead to loss of competitiveness in some countries.
[2]
In a typical foreign exchange transaction, a party purchases a quantity of one currency by paying a quantity of another currency. The modern foreign exchange market began forming during the 1970s when countries gradually switched to
floating exchange rates from the previous
exchange rate regime, which remained
fixed as per the
Bretton Woods system.
