What Determines the Value of a Currency?
|April 16, 2014||Filled under Featured Article|
Do you know what determines the value of a country’s currency?
While the value of a currency is determined by numerous complex factors, investors should have an understanding of how currency values and exchange rates fluctuate. Learn how currency exchange, and supply and demand affect there countries currency. Demand for goods, services and investments all play a key role in the price of a given country’s currency.
Treasury Vault created this info-graphic (bel0w) to show what factors influence the value of a currency and how the relationships between two countries impact their exchange rates. I feel it’s very important to share. This info-graphic is a visual explanation of how a country’s currency is valued. I invite all to read and understand this extremely important subject, as it impacts everyone in the world. What and how much you can purchase with your own country’s currency bank notes is a direct result of what you’ll come to understand below. Anyone interested in foreign currency trading will greatly benefit from this information as well.
The value of a currency is measured by its value relative to other currencies, which is determined by supply and demand. “Demand” in this sense is actually understood as “velocity”, meaning the amount and number of times a particular country’s currency notes circulate within a set period of time. The faster a currency circulates, the more valuable it is perceived due to verified consumer confidence.
The trading relationship between two countries plays a major role in determining the exchange rate between their two currencies. These factors include: inflation, interest rates, current account deficits, public debt, terms of trade and political stability.
The exchange rate of the currency in which an investor’s portfolio holds the bulk of its investments is a major determinant of that portfolio’s return.
A declining exchange rate decreases the purchasing power of income and capital gains derived from any returns in that currency.
Investors looking to succeed in the currency market should look for where there is increasing supply in the market and where there is increasing demand.
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