What is Currency?Why does Currency Value change?

Every country in the world has a currency that is specific to the country.  There are more than 185 different currencies in the world. However, according to the United Nations, only 180 of these currencies are internationally recognized. What is Currency? Difference Between Money and Currency. What are Major Currencies of the World? Why does Currency Value change? Interesting facts about Currency.

What is Currency?

Investopedia defines currency as a “generally accepted form of money, including coins and paper notes, which is issued by a government and circulated within an economy. Used as a medium of exchange for goods and services, currency is the basis for trade.”

How can we create a standard of value that is generally acceptable? In the quest to find an answer to this question, Humans invented currency. Throughout history, various different things have been used as currency including silver, shells and even stores of grains as explained in our article  History of Money : How Money has evolved from Barter to Bitcoins 

The term currency is derived from the Middle English word curraunt meaning in circulation.

When we talk of Currency we usually mean paper notes and coins. Every country in the world has a currency that is specific to the country. A currency has a name, a symbol, fractional unit it can be divided into (For example, Rupees into 100 Paisa, Dollar into 100 Cents) and ISO code (Ex: USD, INR).

Did you know that Rupee is not only the currency of India? The currency of Mauritius, Nepal, Pakistan, Seychelles and SriLanka is also called as Rupee.

Very few countries have fractional units other than 100. For example Mauritanian ouguiya of Mauritania a country in North West Africa can only be divided into 5 Khoums. Vietnamese đồng can be divided into 10 hào

There are more than 185 different currencies in the world. However, according to the United Nations, only 180 of these currencies are internationally recognized.

There are also many countries without their own currency. For example, Ecuador and Panama both use the US dollar as their official currency. Some currencies are used in other countries, For example, the United States dollar is used in 10 foreign countries and in the US. European euro is used in 35 independent states and overseas territories.

The British pound is the world’s oldest currency that’s still in use, dating back to the 8thcentury. The newest currency in the world is the South Sudanese pound, made official on July 18, 2011.

Did You Know? Every year, more money is printed for the game Monopoly than real money printed around the world. There’s around $974 million printed in real money by the US Bureau of Engraving and Printing, while the makers of Monopoly, Parker Brothers, print an impressive $30 billion every year.

Currencies of the World
Currencies of the World

Difference Between Money and Currency

Money and currency are two words that are used every day and are often confused as being the same thing. They are used interchangeably in many scenarios. Let’s explore the difference

Money is a concept that is used to describe a medium to exchange. Money does have a few properties such as it must be a medium of exchange; a unit of account; a store of value; and, occasionally in the past, a standard of deferred payment. Any kind of object that fulfils these functions can be considered as money.

Currency is a tangible concept that is based on intangible money. Currency is the promissory note or coin that is presented in form of
money. Currency is what brings money to life. It is what is traded in return of goods or services

Digtial Currency, Cryptocurrency

When we talk of Currency we usually mean paper notes and coins. But with the advent in technology, we now have digital currency (digital money, electronic money or electronic currency) which exhibit properties similar to physical currencies but allow instantaneous transactions and borderless transfer-of-ownership. Examples include virtual currencies and cryptocurrencies. Like traditional money, these currencies may be used to buy physical goods and services, but may also be restricted to certain communities such as for use inside an online game or social network

A cryptocurrency is a medium of exchange, such as the US dollar, but is digital and uses encryption techniques to control the creation of monetary units and to verify the transfer of fundsThe popular rise of virtual currency started in 2009 with the creation of Bitcoin, the first decentralized cryptocurrency.

Our article Crypto Currency: What is it? Types ex Bitcoin, Ethereum, Technology BlockChain explains it in detail.

Major Currencies of the World

There are more than 185 different currencies in the world. However, according to the United Nations, only 180 of these currencies are internationally recognized.

Every currency does not have equal value. Some are greatly valuable; some are fairly valuable. More often used are some of these greatly valued currencies. One US Dollar ($1) for example, is not equivalent to an Australian or Canadian Dollar. Euros and Pounds are worth different amounts and so on.

There is no global currency that is accepted for trade throughout the world. Some of the world’s currencies are accepted for most international transactions. The most popular are the U.S. dollar, the euro, and the yen. Another name for a global currency is the reserve currency.

Forex (FX) is the market in which currencies are traded. The world’s most-traded currency is the US dollar with about 47% share of global payments and 87% of the forex market’s daily turnover. On the second place is the Euro, having about 33% of the daily forex transactions and 28% share of the international bank payments.

15 Major Currencies in World Payments (in % of World)
Rank Currency February
2017
World 100.00%
1  United States dollar 40.86%
2  Euro 32.00%
3  Pound sterling 7.41%
4  Japanese Yen 3.30%
5  Canadian dollar 1.89%
6  Renminbi 1.84%
7  Swiss franc 1.66%
8  Australian dollar 1.61%
9  Hong Kong dollar 1.30%
10  Thai Baht 1.01%
11  Swedish krona 0.97%
12  Singapore dollar 0.96%
13  Norwegian krone 0.68%
14  Polish złoty 0.51%
15  South African Rand 0.45%

For more details on the Currencies of the world, one can refer to our article Currencies of the World, Tricks to Remember Currencies

US Dollar

There are various currencies called the Dollar. This includes the Canadian Dollar and the Australian Dollar. However, the US dollar refers to the official currency of the United States of America.

  • The US Dollar is the most recognized unit of transaction in the international market. Primarily because the USA is the world’s only military and political superpower and a key driver of the global economy.
  • The currency of most nations is usually measured in relation to the USD.
  • Oil and gold and other commodities are primarily priced in USD.
  • If people anywhere in the world lose trust in their own currency, they turn to the USD. The US dollar is considered the largest currency reserve in the world.

Our article About US Dollar, How coins are minted, Interesting Facts  talks about US dollar in detail

Euro

This currency is simply the currency spent by most members of the European Union. The European Union has 28 members. 19 of these 28 members have Euro as their National currency. In the foreign exchange market, the Euro remains second only to the US Dollar.

Japanese Yen

As a result of Japan’s enormous manufacturing ability, the Japanese yen has grown to a very prominent position in the international market. The Japanese yen has several times been adopted as a means of trading more marketable currencies. However, the Japanese yen is still a giant in the international market.

Some other prominent currencies include

  • The British Pound (England, Scotland, Ireland, Whales)
  • The Canadian dollar (Canada)
  • The Swiss Franc (Switzerland)

Indian Currency

The contemporary Indian notes are Rs 10, Rs 20, Rs 50, Rs 100, Rs 200, Rs 500 & Rs 2000. These notes show the portrait of Mahatma Gandhi on the face & hence is called as Mahatma Gandhi series. Notes have two sides, the side which has the face of Mahatma Gandhi is called as Obverse & the other side is called as Reverse.

Coins in India are presently being issued in denominations of 50 paise, one rupee, two rupees, five rupees and ten rupees. The Government of India has the sole right to mint coins. The designing and minting of coins in various denominations is also the responsibility of the Government of India.

The coins and rupees have changed to keep up with times. Before Independence Indian notes had the effigy of King George VI. Just prior to independence it was replaced by our national emblem, the Sarnath pillar.

Our articles,given below, cover Rupee and Indian Coins in details

All Currencies are not of the same value

Money is not static but its value keeps changing with the society and its economic conditions. One rupee in 1947 is not the same as one rupee today, both in terms of appearance and purchasing power.

Every currency in the world does not have equal value. Some are greatly valuable; some are fairly valuable. One US Dollar ($1) for example, is not equivalent to an Australian or Canadian Dollar. Euros and Pounds are worth different amounts and so on.

When a new country is formed or gets freedom. It launches its own currency. But a country may need to buy from other countries i.e import goods or sell to other countries i.e export goods.  Imagine that you are buying something from a company in China, and you live in America. Chinese company needs to be paid in renminbi, which is their local currency but you have dollars, so there needs to be some way to convert between the two.  If you have $100 but you need renminbi you want to try to get as many renminbis for your $100 as you can.  This is where currency exchange comes in.

Some countries “peg” their currencies. They’ve decided in advance that there is some ideal exchange rate between their currency and some other currency (or some other basket of currencies) and they’ll try to maintain that. So, for example, the Nepalese government has pegged its exchange rate so that 1.6 Nepalese rupees equals one Indian rupee. This is also called a fixed exchange rate. This was the norm from the end of the Second World War until the 1970’s, when the global system of fixed exchange rates, called Bretton Woods, collapsed.

But most countries leave the currency to market forces, called as free-floating.  That means a currency is worth the price a buyer is willing to buy it at. However, there is no true free-floating regime. The central banks always influence these rates so that they do not deviate too much. They achieve this influence by either selling or buying the currencies on the foreign exchange market.

The value of a country’s currency is largely decided by market forces and is linked with its economic conditions and policies such as economic stability, inflation, foreign trade, employment, interest rates, growth rate and geopolitical conditions.

The numerical value of a currency is different from its trade value. The strength or popularity of a currency is an entirely different thing. A Euro or the USD is traded more and is used in more countries than the Kuwaiti Dinar even though KWD is valued as the highest currency in the world.

Highest Value of Currency in the World in 2018 in INR

S.No Currency Country Value in Indian Rupees
1 Kuwaiti Dinar (KWD) Kuwait            241.13
2 Bahraini Dinar (BHD) Bahrain            194.15
3 Omani Rial (OMR) Oman            190.13
4 Jordanian Dinar (JOD) Jordan            103.16
5 Gibraltar Pound (GIP) Gibraltar            95.07
6 Great Britain Pound (GBP) Great Britain            94.81
7 Caymanian Dollar (KYD) The Cayman Islands            87.84
8 Euro (EUR) The European Union            83.70
9 Swiss Franc (CHF) Switzerland            73.41
10 US Dollar (USD) USA            73.18

Why does Currency Value change?

If you have $100 but you need renminbi you want to try to get as many renminbis for your $100 as you can. The price you get is determined by supply and demand. So what affects supply and demand?

Supply is controlled by governments printing money (increases supply) and people holding on to money as a store of value (reduces supply) and people selling the currency in exchange for another one so they can engage in international trade (increases supply).

Demand is controlled by people buying the currency to engage in international trade and by people buying the currency to use it as a store of value.

When demand is greater than supply, the exchange rate goes up. When it’s the other way around, the exchange rate goes down.

The foreign rate of currency changes from time to time. International exchange rates of currencies are dependent on mostly the market forces of demand and supply. Nearly all countries follow a floating exchange rate to determine the value of their currencies against other currencies.

The table below compares the currency value of INR and PKR against USD since 1950. The value of INR against USD depreciated from 4.76 in 1950 to 72.88 in September 2018. The INR has depreciated 1419 per cent against USD in the last 70 years. On the other hand, PKR has depreciated against USD from 4.76 to 128.99. So, PKR has depreciated by 2609 per cent.

Country Currency /USD in 1950 /USD in 1957 /USD in 1967 /USD in 1977 /USD in 1987 /USD in 1997 /USD in 2007 /USD in 2018
India INR 4.76 4.76 7.5 8.73 12.96 36.31 41.36 72.35
Pakistan PKR 3.3 4.76 4.76 9.9 17.39 41.11 60.73 123.53

Source:  Prof. Werner Antweiler, University of British Columbia. 

Inflation, Debt and Currency Value fluctuation

Another reason why currencies fluctuate is that of inflation.  Inflation refers to “a general increase in prices and fall in the purchasing power of a particular currency”

Inflation itself is a factor that is inversely proportional to the value of a particular currency. This implies that the lower the rate of inflation, the higher the value of the currency. Likewise, the higher the rate of inflation the lower the value of a currency.

Another reason that contributes hugely to currency fluctuation is debt. When an economy is deeply involved in an enormous amount of debt her currency’s level of stability will be jeopardized.

ISO Currency Code

The International Organization for Standardization (ISO) provides standards for businesses, governments, and societies. Currencies can be represented in the code in two ways: a three-letter alphabetic code and a three-digit numeric code. For example

  • The US dollar is represented as USD – the US coming from the ISO 3166 country code and the D for a dollar.
  • The Swiss franc is represented by CHF – the CH being the code for Switzerland in the ISO 3166 code and F for a franc.

For currencies, the governing document is called ISO 4217:2015 and is managed by the Secretariat of the Maintenance Agency, in this case the SIX Interbank Clearing Ltd on behalf of the Swiss Association for Standardization, SNV.

For more details on the ISO Currency Code, one can refer to our article Currencies of the World, Tricks to Remember Currencies

Infographic: Interesting Money Facts

Money Infographic
Money Infographic

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