1. Trade and investment: importers and exporters pay in one currency when importing goods, and charge in another currency when exporting goods. This means that they receive and pay in different currencies at the time of settlement. Therefore, they need to convert some of the money they receive into money that can be used to buy goods. Similarly, a company that purchases foreign assets must pay in the currency of the relevant country, so it needs to convert its own currency into the currency of the relevant country.
2. It is speculated that the exchange rate between the two currencies will change with the change of supply and demand between the two currencies. Traders can make a profit by buying a currency at one exchange rate and then selling it at another more favorable exchange rate. Speculation accounts for the vast majority of transactions in the foreign exchange market.
3. Hedging: Due to the exchange rate fluctuation between two related currencies, companies (such as factories) with foreign assets may suffer some risks when converting these assets into local currency. When the value of foreign assets denominated in foreign currency remains unchanged for a period of time, if the exchange rate changes, the value of such assets will be converted into domestic currency, which will generate profits and losses. Companies can eliminate this potential profit and loss by hedging. This is the execution of a foreign exchange transaction, and the transaction result just offsets the gains and losses of foreign currency assets brought about by exchange rate changes.