Definition of Foreign Currency (foreign currency)

The concept of currency refers to a currency used in a region alien to its origin. In other words, it is a foreign currency. Thus, the British pound sterling is a currency outside the borders of the United Kingdom and the US dollar is a currency outside the United Kingdom. USA.

The market for foreign exchange It is the largest market in the world and the one with the most liquidity. Unlike other markets, this one does not have a physical location or an exchange that centralizes financial operations. The buying and selling of currencies is carried out through networks, which connect with corporations, banks and individuals who buy or sell currencies.

A tool that facilitates business relationships

Before the appearance of the currency, the only mechanism to acquire a product was through barter, that is, the exchange of goods. The downside of this system is obvious: those who participate in it need to find something they are looking for. After bartering, they began to trade in metals, especially gold and silver. This modality lacked an exact price system. With the emergence of coins, the

Commerce was able to expand rapidly.

The use of currency serves primarily as a medium of exchange. For some, having foreign exchange is a store of value, as could be a jewel, a painting or a kilo of gold. This consideration is debatable, as any currency devalues ​​over time and therefore storing currency for years could be a lousy business.

The exchange rate and the foreign exchange market

If we relate euros and dollars, the exchange rate would be the amount of euros needed to get dollars. If the euro is the national currency and the dollar is the currency, the exchange rate indicates the value of each of these currencies. In this way, a rise in the exchange rate would mean that you have to pay more euros to get dollars (in this case, the dollar is worth more and the euro is worth less and depreciates against the dollar).

Of course, the exchange rate between two currencies is a determining factor in the foreign exchange market. It must be remembered that in any commercial relationship between countries it is necessary to exchange currencies (there are You have to buy dollars to buy in the United States and you have to get euros to buy in Europe). This circumstance creates a market between currencies and, like any other market, there is a offer and one demand.

Photo: Fotolia - keskinfunda / nito

Currency Topics (foreign currency)