The World of Money
Introduction to Money
Currencies are floated against each other to measure their worth in the global marketplace. A currency's value in the world marketplace reflects whether individuals and governments are interested in using it to make purchases or investments, or in holding it as a source of long-term security.
If the demand is high, the value of the currency increases in relation to the value of other currencies. If it is low, the reverse occurs. They are stable or volatile depending on respective economies which in turn are dependent on inflation/deflation, defaults on loan agreements, serious balance-of-trade surplus/deficits or economic policies.
Currency values of even the most stable economies change over time as traders are willing to pay more or less for dollars or pounds or euros or yen.
Let's say there is a big demand for the stocks or bonds of a particular country. As overseas investors buy it to make investments, its currency's value is likely to rise. Similarly, a low inflation rate can boost a currency's value, since investors believe that the value of long-term purchases in that country will not erode over time.
Governments usually want their currency to be as stable as possible, maintaining a constant relative worth with the currencies of their major trading partners. To achieve that goal, sometimes they interfere with market forces on two fronts. 1) They buy up large amounts of their own currency and/or 2) agree with trading partners to lower interest rates.
If number 2 step is taken, however, fewer foreign investors will want to put money in the country's banks. They will look for better return elsewhere.
When a government wants to make exports more competitive, it might deliberately devalue its currency. The result is that it will sell more goods globally.
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