Fungibility means that two units of a currency can be mutually substituted and the substituted currency is equal to another unit of the same size.For example, two $10 bills can be exchanged and they are functionally identical to any other $10 bill in circulation (although $10 bills have unique ID numbers and are therefore not completely fungible).Gold is probably a closer example of true fungibility, where any 1 oz. of gold of the same grade is worth the same as another 1 oz. of gold.Monero is fungible due to the nature of the currency which provides no way to link transactions together nor trace the history of any particular XMR.1 XMR is functionally identical to any other 1 XMR.
Monero has been built specifically to address the problem of traceability and non-fungibility inherent in other cryptocurrencies.By having completely private transactions Monero is truly fungible and there can be no blacklisting of certain XMR, while at the same time providing all the benefits of a secure, decentralized, permanent blockchain.