The easy reply is that it’s the value at which a vendor and a purchaser of the foreign money agreed on a value for it; i.e. the worth at which the market clears. The bought foreign money is, in any case, a commodity.
It could allow you to to strip away any superfluous notions to consider it as a pound of espresso or somesuch. Vendor Sally has espresso however desires {dollars}. Purchaser Bob has {dollars} and desires espresso. Sally won’t half along with her espresso for lower than $4. And Bob won’t purchase espresso for greater than $3 {dollars}. The market fails to clear at these costs. A brand new vendor, Sam enters the market and is keen to promote his espresso for $3.50. And a brand new purchaser, Invoice, enters and is keen to purchase espresso for $3.50. Sam and Invoice change espresso for {dollars}. This reality is printed to the remainder of the market individuals; who’re thereby capable of conclude that in some unspecified time in the future within the current previous that two individuals have been capable of transact on the value of $3.50. As an entrant to the market, are you assured to search out one other purchaser or vendor at that value? No. But it surely’s a helpful piece of information.
In the event you actually wish to know the way this — and financial system normally — works, you may need to perform a little studying. As a begin, I like to recommend:
Murray Rothbard, Man, Economic system, and State
http://mises.org/rothbard/mes.asp
Ludwig von Mises, The Concept of Cash and Credit score