Money Across Borders

Money serves three functions: a medium of exchange, a unit of account and a store of value. Inside one country these jobs are handled by a single currency, but international trade requires converting one currency into another, which creates both opportunity and risk. A Brazilian coffee exporter paid in dollars must change them into reais, and if the exchange rate moves before payment arrives, profits can vanish.

To manage this, firms use forward contracts and other hedges, and banks run a foreign exchange market that trades trillions of dollars every day, by far the largest financial market in the world. A small number of currencies, above all the US dollar, dominate international trade, debt and central-bank reserves, which gives the issuing country special advantages. How countries manage the value of their money, and how money moves between them, shapes trade, investment and the risk of crises.