Saturday, August 5, 2017

What Determines the Value of Currency? By Naima Manal , 5 AUGUST

The value of currency is determined by its selling and purchase price as a commodity. This is affected by the amount of currency that is bought. When a currency is very popular and many people buy it, then its value increases.

However, when a currency is not purchased often, then its value decreases.


Currencies were once assessed by the gold standard, which compared currencies to the U.S. dollar and then to the value of gold.
However, this was abandoned after WWI. The current method of assessing currency values is based on the floating currency exchange rate, which is a more efficient way of valuing currency from one country to another, even though currency values fluctuate from day to day.


Currencies are traded in pairs, such as the U.S. dollar to the Euro, so that the value of one currency is seen against the other, then other related factors are also examined to determine the overall currency value.


The Fair Market Value of a currency is based on the agreed amount at which it is bought and sold. Many factors are considered about the country when determining a reasonable trade value.

Economic Conditions

The economic condition of a country, such as employment rates and opportunities for growth, is examined when comparing its currency to another country. Currencies of prosperous countries are then given a higher value than the currency of economically struggling nations.


The political climate of a country is assessed for its stability in its national governance, and in the global political realm. The value of currency is directly affected by the country's allies and enemies, as well as political agendas.

War Affects Currency

Whether or not a country is at war also affects the value of the currency trade. Not only does the war itself raise heightened economic concerns, but currency is either strengthened or weakened by the purpose of the war, the country's role and allies in the conflict.


How Does Printing Currency Devalue the Dollar?
By Alex Kocic

Printing extra dollars makes them worth less.

By printing extra notes, a government increases the total amount of money in circulation. If that is not followed by an increase in production, there is more money to spend on the same amount of goods and services as before. Everything costs more, thus our money is worth less.

Money Supply

Money supply is the total amount of coins and notes in a country's economy. More coins and notes in circulation means that the money is worth less. The U.S. Federal Reserve (Fed) rarely prints extra money. Instead, it uses other mechanisms to increase the money supply.

Reserve Requirements

The Fed sets the reserve requirements banks must hold at any time. By lowering those requirements, the Fed can allow banks to inject more money into the economy.

Interest Rates

By lowering short-term rates at which banks borrow money from it, the Fed can make money cheaper and thus more widely available.

Open Market Operations

The Fed can use its reserves to buy government bonds and in that way release extra cash into the economy. It can also reduce the amount of money in circulation by selling those bonds.


Each of the three ways of increasing money supply can lead to inflation, which is a sustained increase in prices over a period of time. Inflation devalues our money by reducing our purchasing power. Although we may have more dollars to spend, they buy less then before because prices have gone up.

Benefits of Extra Money

Sometimes the benefits of extra money in the economy outweigh the costs of inflation. In times of recession, extra money helps revive the economy, while a devalued dollar makes U.S. exports cheaper and more competitive abroad.


How Do Currencies Fluctuate?
By Joseph Nicholson

When currencies were linked to specific weights of gold or silver, their value changed very little over time. For hundreds of years, until the twentieth century, this was the case. In the modern market-based currency system, currencies have no fixed value, and instead, they are quoted in relation to other currencies.

The result is a system wherein currencies fluctuate based on the buying a selling of participants in global currency markets. This leaves the value of currencies subject in large part to speculation and interest rate arbitrage as much as or more than the economic strength of a particular economy.

Nevertheless, issues of supply and demand still factor largely in currency markets. Demand for currency for actual buying is called "transactional demand." This demand is generated by large international transactions. For example, on most exchanges or bourses, crude oil is sold only in U.S. dollars.

This makes it imperative for oil importing nations to have a supply of US dollars, which in turn props up the dollar's value by creating demand. Similarly, net exporters sell their goods in their local currency, obliging their trading partners to own at least some of the transactional medium.

Currencies are also largely subject to interest rates. Despite Japan's strong technological exports, it has maintained a low interest rate environment for years, keeping its currency low relative to other major world economies.  
​Not only do low interest rates reduce transactional demand by encouraging investors to park their money in higher-yielding currencies, they can actually change the supply of currency in circulation. In order to effectuate a change in interest rates, central banks must add or remove money.

Higher interest rates require the reduction of supply, which drives up the value. Additionally, changes in interest rates inspire speculators to buy or sell a currency in an attempt to "price in" the changes far faster than the normal circulation would provide.

Speculation provides another important role in the fluctuation of currencies. Investment in currencies is at least in part based on the perceived performance of an economy relative to most others.

 Countries whose GDP grows faster than their money supply are in effect increasing the value of their currency. These countries will be able to raise their interest rates and pay more for debt.

Speculators will attempt to capture this added value through a variety of investments, including the outright purchase of currency in the foreign exchange market, which is where currency fluctuations originate.


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