Currency helps the goods and services trading, serving as an exchange unit. It works as a medium of exchange, a form of money, a store of value or as a standard value measurement. A country or a region where a certain currency is the main exchange medium is known as a ‘currency zone’. The exchange rates show how much a currency is valued in terms of another.
Certain exchange rates prevail with the purpose of facilitating trade and commerce between countries. Currencies are of two main types, depending on the regime of the exchange rate: fixed currencies and floating currencies. The exchange rates are prices on which services, goods and currencies of various countries may be exchanged with each other. Currency denotes paper money in general, bank notes and coins.
A big role in the foreign exchange markets is played by the national central banks which have power over he inflation, interest rates and money supply. The market can be stabilized by the banks using their foreign exchange reserves, sometimes having an aggressive intervention.
Supply and demand forces set the currency prices. Three types of elements influence supplies and demands: market psychology, economic factors and political conditions. Economic factors that influence the currency are government surplus or deficit of budget, inflation, economic growth, balance of trade levels. When a country has a high or rising level of inflation, the currency’s value begins to go down, because the purchasing power is worn out by inflation. A country’s growth can be revealed through various reports: retail sales, employment levels or the gross domestic product (GDP).
Political conditions, whether regional, internal or international, also have effects on the currency markets. Instability in the political field of a country can have negative effects on its economy. Certain events in a country can also influence its currency.
The Ministry of Finance gets the authority to practice control over the country’s currency. This is what happens when a country dominates its own currency. The institution, which has the power over the monetary policy of a certain country, is named monetary authority over a limited period of time. The level of authority is varies depending on the governments which have set them.
Some countries may use similar names for the currencies: the United States of America and Canada have the U.S. Dollar and the Canadian Dollar respectively. Also, many countries may have the same currency, like the Euro.