Types Of Currency And Exchange Rate Policies
August 2, 2018
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The currency was created a very long time ago. Thanks to it, trading has become convenient and the world economy has developed greatly. Forms of currency have changed throughout history. New forms of currency appear because humans always want better methods of payment. If you have a store on Shopify, you should care about changes in exchange rate and currency policies.
Types of Currency
Coins are made of metals, especially precious metals like gold or silver. They contain a true intrinsic value. The question is whether notes like Korean won or US dollar are valuable. Notes are not made of precious materials, but they represent the value which is printed on the notes. That’s called face value.
Each coin or note is exchanged for a fixed amount of a commodity. They are representative money. For example, in the World War II, 35 US dollars value 1 ounce of gold. President Nixon decided to use the US dollar as fiat money. This means it holds value simply because people believe that other parties will accept it. Euro and British pound are fiat money too.
Exchange Rate Policies
Governments offer a fixed exchange rate to manage the process of acquiring foreign currencies. Governments having the major currencies in the world like US dollar or Euro set a firm exchange rate between two denominations. In order to maintain the local exchange rate, the central bank trade currency to which it is pegged.
The fixed exchange rate helps create a sense of stability. If a nation’s financial market is less sophisticated than other countries. When the purchase of local currency by central bank causes overvaluation, fixed exchange rate leads to currency crises.
The United States of America applies a floating exchange rate. The government doesn’t pre-determine the price of a foreign currency. The market dictates the cost. The rules of supply and demand govern a foreign currency’s price. When the amount of money rises up, the denomination will be cheaper for foreign investors. If the demand increases, the currency has more power.