Foreign currency refers to the currency or money of a country other than one’s own. In other words, if you’re based in the United States, any currency that isn’t the U.S. dollar (USD) — such as the Euro (EUR), the British Pound (GBP), or the Japanese Yen (JPY) — is considered foreign currency.
People might need foreign currency when traveling to other countries, conducting international business, or investing in foreign markets. You can typically exchange your home currency for foreign currency at banks, foreign exchange bureaus, or automated teller machines (ATMs) in the country you’re visiting.
It’s important to note that foreign currency exchange rates fluctuate based on a variety of economic factors, including interest rates, inflation, political stability, and economic performance. These fluctuations can impact the cost of buying foreign currency and the potential returns on foreign investments.
Example of Foreign Currency
Imagine that Sarah, who lives in the United States, is planning a vacation to France. In the United States, the currency used is the U.S. dollar (USD). However, in France, the currency used is the Euro (EUR). Therefore, to be able to pay for things in France, like meals, accommodations, or souvenirs, Sarah needs to have Euros.
Before her trip, or upon arrival in France, Sarah can go to a bank or a currency exchange service to exchange her U.S. dollars for Euros. The exact amount of Euros she will receive depends on the current exchange rate between the USD and the EUR.
For instance, if the exchange rate is 1 USD = 0.85 EUR, and Sarah exchanges 1000 USD, she would receive 850 EUR. These Euros are considered a foreign currency to Sarah, as she usually uses U.S. dollars for her transactions. If the exchange rate changes during her trip, it would affect the value of her U.S. dollars in Euros, which is why exchange rates are important to consider when dealing with foreign currency.
Furthermore, when she returns to the United States, if she still has some Euros left, she can exchange them back to U.S. dollars. However, the amount she receives in U.S. dollars may be more or less than her initial amount depending on the exchange rate at that time.