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Foreign exchange market

Definition

The foreign exchange market, also known as the forex market, is where currencies are bought and sold. It is a decentralized global marketplace where participants trade different currencies based on their expectations of future currency values.

Analogy

Imagine going to a foreign country and exchanging your dollars for their local currency at an airport kiosk. The foreign exchange market is like a giant version of that kiosk, where people from all over the world come together to exchange different currencies.

Related terms

Exchange Rate: An exchange rate is the value of one currency expressed in terms of another currency. It determines how much one currency can be exchanged for another.

Currency Appreciation: Currency appreciation occurs when a currency increases in value relative to other currencies in the foreign exchange market. This means that it can buy more goods and services from other countries.

Balance of Payments: The balance of payments is a record of all economic transactions between residents of one country and residents of other countries during a given period. It includes trade in goods and services, financial flows, and transfers between countries.