Foreign Exchange Liquidity

Definition ∞ Foreign exchange liquidity describes the ease with which one national currency can be exchanged for another without significantly impacting its market price. It represents the depth and activity within a specific currency market. High liquidity ensures efficient trading and minimal price impact for substantial transactions.
Context ∞ In the digital asset sector, foreign exchange liquidity is particularly relevant when considering stablecoins pegged to fiat currencies or when converting cryptocurrencies to traditional money. The prospective introduction of central bank digital currencies (CBDCs) could substantially alter existing foreign exchange markets and their liquidity dynamics. Market participants continuously monitor factors influencing liquidity to manage trading costs and execution risks.