A foreign currency is a currency used in international transactions, different from the local currency.

What is a foreign currency payment?

A foreign currency payment is a transaction where a foreign currency is used to make a payment, such as for purchases or services.

What are foreign currencies in banks?

The foreign exchange market in banks is the foreign currencies that banks hold and manage, facilitating international exchange and trade.

How does currency trading work?

Currency trading involves buying and selling currency pairs in the forex market, taking advantage of price fluctuations to make a profit.

How does foreign exchange work?

Foreign exchange is the process of converting one currency to another, determined by the prevailing exchange rate in the international market.

What Is a Currency? Learn to Invest in the Forex Market

Currencies are a fundamental concept in the world of investments and the global economy. For any investor, especially those just starting out, understanding what a currency is and how it works is key to making informed transactions and sound decisions.

In this article, you'll learn everything you need to know about currencies, their value, how they're calculated, and how you can start investing in them easily and safely.

What is a currency?

A currency is a foreign currency used in international exchange. Basically, it's the money issued by a country and recognised as a means of payment outside its borders.

Difference between local currency and foreign currency

A local currency is the money used within a country. For example, the Mexican peso (MXN) in Mexico or the Argentine peso (ARS) in Argentina.

A currency is any foreign currency that is used outside its country of origin, such as the US dollar (USD) or the euro (EUR).

Types of currencies

There are several types of currencies, and these are the main ones:

Hard currencies: These are currencies that are widely accepted in world trade and consistently maintain their value.
Weak currencies: These currencies tend to suffer significant fluctuations in value, making them less attractive for international trade.
Reserve currencies: These are currencies that central banks around the world hold in large quantities due to their stability.

Each of these types has specific characteristics that affect their use in international trade and their volatility in markets.

How does a currency work?

Currencies are used for international transactions, both commercial and financial.

For example, if a company in Europe buys products from a company in the United States, it will probably pay in US dollars, which is the currency of that country.

The value of a currency is determined by the foreign exchange market, popularly known as the foreign exchange market or forex, where exchange rates fluctuate constantly based on supply and demand.

Factors such as interest rates, inflation and the political stability of a country directly influence the value of its currency.

Why invest in foreign exchange?

High liquidity: The foreign exchange market is the largest and most liquid market in the world, which allows you to execute trades quickly.
Diversification: Investing in currencies can be an effective way to diversify your portfolio and reduce risk.
Accessibility: Trading platforms are available 24 hours a day, allowing you to trade at any time.
Profit potential: Fluctuations in exchange rates offer opportunities to make significant profits.
Leverage: Many brokers allow leveraged trading, which means you can control large positions with a smaller investment.
Hedging: Investing in currencies can help protect you against inflation and depreciation of your local currency.
Analysis and trends: Technical and fundamental analysis allow you to forecast market movements and make informed decisions.

Example currencies: Major world currencies

Here is a table with examples of major currencies, along with their codes and descriptions:

Currency	Code	Description
US Dollar	USD	The official currency of the United States and the most widely used currency in international trade
Euro	EUR	The official currency of the Eurozone, used by 19 of the 27 countries of the European Union
Japanese Yen	JPY	The official currency of Japan, recognised for its symbolism in the Asian economy
Australian Dollar	AUD	The official currency of Australia, also used in some Pacific territories
Swiss Franc	CHF	The official currency of Switzerland, considered a safe haven in times of uncertainty

Illustrative chart of currency behavior.

Latin American currencies

The following is a list of the official currencies of Latin American countries:

Argentina: Argentine Peso (ARS)
Brazil: Brazilian Real (BRL)
Colombia: Colombian Peso (COP)
Chile: Chilean Peso (CLP)
Mexico: Mexican Peso (MXN)
Costa Rica: Costa Rican Colon (CRC)
Cuba: Cuban Peso (CUP)
Dominican Republic: Dominican Peso (DOP)
Ecuador and Panama: US Dollar (USD)*
Paraguay: Paraguayan Guarani (PYG)
Peru: Peruvian Sol (PEN)
Uruguay: Uruguayan Peso (UYU)
Bolivia: Boliviano (BOB)

Value of a currency

The value of a currency refers to how much one currency costs compared to another. This value is established through the exchange rate, which is the rate at which one currency can be exchanged for another.

Examples of currency exchange rates

Euro against the US Dollar (EUR/USD): 1 euro = 1.16 USD
US Dollar against the Japanese Yen (USD/JPY): 156.15 (1 USD = 156.15 JPY).
British Pound against the US Dollar (GBP/USD): 1 GBP = 1.3224 USD

How is the value of a currency determined?

The value of a currency is not fixed. It is determined by several factors that influence the supply and demand for the currency in international markets.

Below are the key factors that affect the value of a currency:

Factor	Description
Supply and demand	The greater the demand for a currency is, the higher its value is. The lower the demand is, the lower its value is.
Monetary policy	Central banks can increase or decrease the value of a currency through changes in interest rates.
Economic stability	Confidence in a country's economy influences the strength of its currency.
Inflation	The higher inflation is, the lower a currency's purchasing power, and therefore its market value, is.

How are currency exchange rates calculated?

The value of a currency is calculated through the exchange rate. This exchange rate is the value of one currency in relation to another and varies constantly.

Example of currency exchange rate calculation:

If you have 1,000 USD and the exchange rate is 20 MXN/USD, you will get 20,000 MXN.
If you have 5,000 ARS and the exchange rate is 0.01 USD/ARS, you will receive 50 USD.

For investors, correctly calculating the exchange rate is crucial to know how many units of a currency they will receive when making a transaction.

The forex market and its relevance to currencies

The forex (foreign exchange) market is where different currencies are traded. It's the largest and most liquid financial market in the world, with a trading volume of over 6 trillion USD a day.

In the forex market, traders buy and sell currency pairs as they speculate on changes in their relative values.

Advantages of investing in forex

High liquidity: You can buy and sell currencies with ease due to the large trading volume.
24-hour access: The forex market is open 24 hours a day, five days a week.
Diversification: Investing in currencies allows you to diversify your investment portfolio.

Currency pairs: What are they, and how do they work?

In the foreign exchange market, transactions are not made in individual currencies, but rather in currency pairs. A currency pair represents the value of one currency in relation to another.

Components of a currency pair:

Base currency: The first currency in the pair, which is being bought or sold. In the EUR/USD pair, the euro (EUR) is the base currency.
Quote currency: The second currency of the pair, which is used to determine the value of the base currency. In the same pair, the US Dollar (USD) is the quote currency.

Types of currency pairs

Major pairs: These are the most traded and have high liquidity. They generally involve the US Dollar.
Crossed pairs: These pairs don't involve the US dollar and are usually less liquid.
Exotic pairs: These involve a major currency and the currency of an emerging country. They tend to have higher risk and lower liquidity.

Examples of currency pairs

In the following table, you can find examples of currency pairs:

Currency Pair	Description	Type
EUR/USD	Euro vs US Dollar	Main
USD/JPY	US Dollar vs Japanese Yen	Main
EUR/GBP	Euro vs Pound Sterling	Cross
USD/SEK	US Dollar vs Swedish Krona	Crossed
USD/TRY	US Dollar vs Turkish Lira	Exotic
USD/THB	US Dollar vs Thai Baht	Exotic

Person counting cash dollars.

What is exchange parity?

Exchange parity is the relationship between the value of two currencies. Exchange rates can be of two types:

Fixed exchange rate: The government sets the value of its currency relative to another, such as the Hong Kong Dollar (HKD), which is pegged to the US Dollar.
Floating exchange rate: The value of the currency is determined by the market, depending on supply and demand. This is the case for most major currencies, such as the USD or EUR.

How to invest in currencies

If you want to invest in currencies, it is important not only to know about the concepts of the forex market, but also to have a good investment strategy.

Conclusion: Start trading forex with Libertex

Understanding what a currency is and how its value works is essential for any investor who wants to participate in the global market. Currencies are the basis of international trade and offer attractive opportunities for those interested in the foreign exchange (forex) market.

Create your Libertex account and start trading currencies today!