When doing business internationally, travelers will need to exchange money to pay for goods and services in the local currency. To do this, they turn to a global marketplace that specializes in foreign currency transactions. This market, also known as the forex (f/x) market, trades currencies around the clock and has a profound impact on the world economy.
Currency markets function like stock markets in that they are based on supply and demand. Unlike the stock market, though, which trades shares of companies, currency markets trade currencies. The underlying value of a currency is determined by a number of factors including foreign trade, investment, tourism and geopolitical risk.
The primary functions of a foreign exchange market are to facilitate currency conversions, provide instruments for managing foreign exchange risk and allow investors to speculate in the market for profit. A large portion of the market’s demand comes from international businesses that need to manage their exposure to foreign currency fluctuations.
When a country experiences political instability, anticipation about the new ruling party or other regional events can spur positive or negative interest in a currency. This, in turn, can influence the exchange rate. Travelers can also save on exchange fees by using credit cards, prepaid cards or U.S. dollars instead of local currency at hotels, restaurants and other tourist-based businesses. Credit card companies often offer the best exchange rates. They also have the added benefit of providing protection and additional reward points for cardholders.
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