In the world today, most countries have different currencies. People and firms need to convert from one currency to another when selling, buying, hiring, borrowing or investing across national borders. This is why the foreign exchange market exists.
The foreign exchange market is a global decentralized market for the trading of currencies. This market determines the foreign exchange rate. It includes all aspects of buying, selling and exchanging currencies at current or determined prices. In terms of trading volume, it is by far the largest market in the world.
Demand for a currency depends on the need for cross-border transactions. For example, a tourist in a foreign country needs to buy local goods and services and must pay for them in the local currency. This demand creates a need to change currency and is an important source of volatility in the foreign exchange market.
Other demand factors include the need to invest in foreign companies and assets, which also generates a need for exchange. The resulting volatility in the foreign exchange market is driven by a mix of supply and demand factors.
In addition, international political events and economic conditions can have an effect on currency prices. For example, a sudden increase in a popular coalition government in Pakistan or Thailand may spur positive or negative expectations about those nations’ future economic performance and thus affect their currencies. Finally, changes in interest rates in one country can have an impact on the price of its currency relative to other currencies.