What is the purpose of foreign exchange (FOREX) markets?

The foreign exchange (FOREX) markets serve a crucial purpose in the global economy by facilitating the buying and selling of currencies. This process enables various international transactions, including trade, investment, and tourism, by providing a mechanism for converting one currency into another.

When businesses or individuals engage in international trade, they often need to exchange their local currency for foreign currencies to pay for goods and services. The FOREX markets enable this by providing liquidity, ensuring that parties can easily buy or sell currencies at prevailing exchange rates. This is essential for the smooth functioning of global commerce. Additionally, the FOREX market allows for the management of exchange rate risk, enabling businesses to hedge against potential fluctuations in currency values.

In contrast, while stabilizing local currencies against international currencies may occur indirectly through the activities in the FOREX market, it is not the primary purpose. Regulating international trade tariffs and insisting on exclusive trade within national borders do not align with the fundamental role of FOREX, which is to facilitate currency exchange rather than focus on trade restrictions or tariffs.