And who determines currency values?
The answer to the second part is simple. Currency value is determined by the buyers of the currency. These are mainly travelers, governments and forex traders. FOREX stands for Foreign Exchange. There are many factors that currency traders, governments and companies take into account when determining the Fair Market Value of a currency.
Fair Market Value is the price at which a willing buyer and a willing seller come together. The buyer must take into account many elements and considerations to try to accurately assess the value of a currency at any time. There are now around 180 different currencies in the world. Let us consider some factors that are used to determine the value of a currency.
Factors that influence the currency value:
1. Political conditions in the country – This includes the stability of the government, the amount of corruption, bribery and the level of order. Also includes country relationships with other countries and especially their relationship with the US, the UK, China and Russia. The form of government in the country is also a factor used to assess the value of a currency. Consider the widely divergent forms of government in Saudi Arabia, China, the UK, Venezuela and Thailand, to name just a few.
2. Economic situation – This includes factors such as jobs, unemployment, work ethic, infrastructure, inflation and direction of the economy. Is it older or newer in orientation; computers and high-tech, or more agriculture and production.
3. External perception – The perceptions and attitudes of other countries towards a country are just as important as the reality of the country's actual situation. News, media, films, newspapers, rumors and spin can cause perceptions. How much is known about a country? The less that is generally known, the lower the value of a currency.
4. Demography – A young population can mean better prospects for the future, people who are more open to change and development and a growing workforce. The total population of a country plays a role. How much weight does this country have on the world stage?
5. National leaders – The openness, reliability and likeability of visible leaders is a factor. This includes political leaders, sports figures, business owners and celebrities. Here are some national figures that affect their countries, in a positive or negative sense. Kim Jung Il, David Beckham, Nicole Kidman, Madonna, Osama bin Laden, Barack Obama and Vladimir Putin. These help shape the perception of the world of a country.
6. Insulation versus openness – Continuum China is becoming more open and transparent. This helps. Cuba is very closed and isolated. Venezuela is becoming increasingly isolated by some of its recent actions. China's markets are becoming increasingly open. Cuba, Kyrgyzstan, Russia and Japan all have different levels of openness with the outside world, which influences the value of their currencies.
7. Natural resources – The type and amount of exploitation of the natural resources of a country certainly contributes to creating a perception of value, or lack thereof, of a national currency. Mining of minerals, forests, oil, fish and other resources are being considered. Also the level of technology to develop these resources.
8. Weather factors such as droughts, tsunamis, earthquakes and floods are taken into account. How often do they occur and how does the country respond. These also influence the desirability, safety and perception of a country. Is it a tourist destination?
9. War and conflicts – With which other country is a country at war, and who are the allies? Their military strength and technology, their willingness to wage war and for what, are important factors in judging the strength, stability and value of a country's currency.
10. Education – This includes spoken languages, level of computer knowledge, internet connection, culture and religion. Scientists, entrepreneurs, authors and inventors are all influenced by the type and quality of education in a country.
In conclusion, currency values are determined by many factors. Not just one issue, but a composite of many should be considered. In trading currencies, such as in FOREX, transactions are usually done in pairs. Values must be relative to something. So how does one country compare to another is also important. Common forex pairs are, for example, US dollars and Japanese yen, euros and US dollars. These and other factors determine the value of a currency. Some are tangible, others elusive. Some are solved and some are manageable. Sometimes it is the news of the moment and sometimes the lengthy situation. That is why currency values often change and there is no place or person that determines currency values. And why currency exchange, based on fluctuating currency values, can be an exciting, lucrative, volatile, fun or disastrous form of business or investment.