And who determines currency values?
The answer to the second part is easy. Currency value is determine by the purchasers of the currency. These are primarily travelers, governments and Forex traders. FOREX stands for Foreign Exchange. There are many factors that currency traders, governments and businesses take into consideration in 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 factor in many elements and considerations to try to accurately assess a currency's value at any given time. There are approximately 180 different currencies in the world now. Let's consider some of the factors that are used to determine a currency's value.
Factors Affecting Currency Value:
1. Political Conditions in the Country – This includes the stability of the government, the amount of corruption, bribery and the degree of law and order. Also includes a country's relationships with other countries and especially their relationship to US, 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 varying forms of government in Saudi Arabia, China, UK, Venezuela and Thailand, just to name 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 farming and manufacturing.
3. Perception from Outside – The perceptions and attitudes of other countries toward a country are as important as the reality of the country's actual situation. News, media, movies, newspapers, rumors and spin can create perceptions. How much is known about a country? The less that is known, generally, the lower the value of a currency.
4. Demographics – A young population may mean better prospects for the future, people who are more open to change and development and a growing size of the workforce. The overall population of a country is a factor. How much weight does this country have on the world scene.
5. National Leaders – The openness, trustworthiness and likeability of visible leaders is a factor. This includes political leaders, sports figures, business owners and celebrities. Here are some national figures who affect their countries, either for better or for worse. Kim Jung Il, David Beckham, Nicole Kidman, Madonna, Osama bin Laden, Barack Obama and Vladimir Putin. These help form the world's perception of a country.
6. Isolation versus Openness – Continuum China is becoming more open, more transparent. This helps. Cuba is very closed and isolated. Venezuela is becoming more isolated by some of its recent actions. China's markets are becoming more open. Cuba, Kyrgyzstan, Russia and Japan, all have differing levels of openness with the outside world, which affects the value of their currency.
7. Natural Resources – The kind of and amount of exploitation of a country's natural resources certainly helps create a perception of value, or lack thereof, of a country's currency. Mining of minerals, forests, oil, fish and other resources are considered. Also the level of technology to development these resources.
8. Weather Factors such as drought, tsunamis, earthquake and floods are taken into consideration. How frequent are they and how is the country's response to them. These also affect 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 is it's allies? Their military strength and technology, their willingness to go to war and for what, are important factors in assessing a country's strength, stability and the value of its currency.
10 . Education – This includes languages spoken, level of computer know-how, Internet connectedness, culture and religion. Scientists, entrepreneurs, authors and inventors are all affected 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 must be considered. In trading currencies, such as in FOREX, trades are usually made in pairs. Values must be relative to something. So how is a country doing relative to another country is also significant. Common Forex pairs are US dollar and Japanese yen, Euro and US dollar, for example. These and other factors determine the value of a currency. Some are tangible, some intangible. Some are fixed and some are manageable. Sometimes it is the news of the moment and sometimes the long-term situation. That is why currency values are often changing and there is no one place or person who 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.