What is foreign exchange?
"Foreign exchange" refers to money denominated in the currency of another nation of group of nations. Any person who exchanges money denominated in his own nation's currency acquires foreign exchange. The size of the transaction is irrelevant. A person changing a few pounds at Heathrow International airport or cashing a traveler's cheque at a shop in Venice is involved in a foreign exchange transaction just the same as a company who is changing millions of dollars in order to make an investment I another country.
Role of the "Exchange Rate"
The exchange rate is a price - it is the number of units of one currency that can be bought by a number of units of another currency, and vice versa. In the spot market, there is an exchange rate for every currency traded in that market.
A currency's market price is determined by supply and demand, by buyers and seller, that is, the market participants, whether individual or institutional. A currency with an exchange rate that is fixed requires the support and intervention of its central bank to keep the currency at the fixed rate.
By contrast, a floating currency can fluctuate in value, determined by the market participants buying or selling the currency
Intervention
In many cases a central bank may want to alter exchange rates but without making government economic policy changes. In these cases the desired effect can be reached by changing the market's perceptions about the value of the exchange rate or other economic variables.
In some case a central bank uses covert intervention by either buying its own currency with foreign exchange reserves or in some instances buying foreign exchange reserves in order to weaken its own currency. In the long-term a central bank cannot fight market forces indefinitely. Even central banks do not have unlimited reserves. Therefore, the timing of intervention, in order to achieve the maximum psychological impact, is very important.
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