The Golden Edge
{Sapientiae & Veritas}
Commentary on economy that effects the markets, that help you generate trade ideas, research and tested strategies, Not fake news just the facts, , Real Time Knowledge To Secure Your Future. Read daily or weekly
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Biden Is After
Your Retirement Money
Your Money
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Today Strongest Currency's |
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How the value of a currency is determined
According to mainstream economics, money alleviates this problem. It provides a universal store of value that can be readily used by other members of society.
The rupee (INR) has depreciated by 3.25% against the dollar (USD) during this calendar year. It was trading at 73.52 to a dollar today. So how are these currency values determined? What are the factors that impact the exchange rate? All this, and much more in this article.
The years 1944 and 1971 are very important in the development of the currency exchange framework.
The Bretton Woods Agreement (BWA) was negotiated in July 1944 by delegates from 44 countries. It created a collective international currency exchange regime.
BWA required a currency peg to the US dollar, which was in turn pegged to the price of gold with diversions of only 1% allowed. These countries were brought together to help regulate and promote international trade across borders.
In 1971, following concerns that the United Statesâ gold supply was no longer adequate to cover the number of dollars in circulation, President Richard Nixon devalued the US dollar relative to gold.
By 1973 the Bretton Woods System had collapsed. Countries were free to choose any exchange arrangement for their currency, except pegging its value to the price of gold.
Countryâs economic prospects:
This means higher the productivity/growth prospects, the greater the visibility/institutional credibility, and the better the price stability, the stronger would be its currency.
Relative Demand for the currency in global markets:
Like other products and commodities, currency is no different. The more the demand for a currency compared to others, the higher would it be its value.
Fully floating:
The demand and supply of its currency in the foreign currency markets determines the exchange rates. There is no intervention by the central bank to guide the currency in a particular director nor arrest the rise or support the fall in its value. The US dollar, Euro is an example of this.
Partially floating:
The demand-supply and economic developments determine the exchange rate, but the central bank monitors the rate closely and intervenes depending on its exchange rate philosophy. For example, Indiaâs central bank, the Reserve Bank of India, periodically intervenes to ensure that the Rupee does not appreciate/depreciate significantly especially against the US dollar.
Pegged Rates:
The central bank becomes a market maker of sorts in such situations by announcing the rate at which its currency will be bought or sold. The Hong Kong Dollar has been pegged to the US dollar since 1983.
Today, most of the major currencies around the world, including the euro, British pound, and Japanese yen, fall into this category. Fiat money moreover derives its value from the trust in the government and its ability to levy and collect taxes.
ï»żThe Impact of Inflation:
Most of the major economies around the world now use fiat currencies. Since theyâre not linked to any physical asset, governments have the freedom to print additional money in times of financial trouble. While this provides greater flexibility to address challenges, it also creates the opportunity to overspend.
For this reason, central banks in developed countries usually try to keep inflation under control by indirectly taking money out of circulation when the currency loses too much value.
The Bottom Line
Regardless of the form it takes, all currency has the same basic goals. It helps encourage economic activity by increasing the market for various goods. And it enables consumers to store wealth and therefore address long-term needs. Currency was once limited to the domain of physical coins and bills, but today's digital economy means that money now exists as data stored in ledgers at banks, and is even transcending the possibility of tangibility with the development of cryptocurrencies such as Bitcoin which can never be made physical.
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Notice using a roll of coins that is actually just electronic thin air money!
No real coin here at all!
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THE HISTORY OF CURRENCY:
WHAT CAN BE MONEY?
For nearly as long as there have been thriving societies, there have been different currencies within them. As Investopedia puts it, âMoney, in and of itself, is nothing.â This is certainly true, especially when considering what has been used as money throughout the centuries: animals, sea shells, paper, plastic, metal, and even nothing at all (a.k.a. digital currency!).
At the start, people bartered, which meant they exchanged one thing for another that they deemed of equal value. This is more or less the forerunner to modern exchange rates, but it dates back over tens of thousands of years, likely as far back as the dawn of modern humans. In fact, PBS Nova mentions how bartering is not exclusively a human activity. Many animals also engage in bartering in the form of symbiotic relationships. Though this is not exclusively the same as human bartering, it is an exchange of something of value from which both parties benefit.
Starting in roughly 9000 B.C. to 6000 B.C., humans began to use cattle as a form of currency as well as sheep, camels, and other types of livestock. Due to these animals providing labor, food, and even transportation, their value was obvious between the people who exchanged them for goods and services. It wasnât until 1200 B.C. that cowrie shells were first used as currency in China. Cowrie shells come from a mollusk most commonly found in the shallows of both the Pacific and Indian Oceans. These shells have been used as money in many societies, including some parts of Africa. In fact, the cowrie shell is one the longest and most widely used currency in history.
Modern coinage made its debut in 500 B.C. and was created from precious metals like silver, bronze, and gold, which held the most value of the three. Like our money today, the first modern coinage was stamped with images of gods, emperors, and other important leaders both to mark their authenticity as well as claim the money for the specific culture.
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The End of the U.S. Dollar's Reign?
How likely is it that the dollar will be dumped as the world's reserve currency?
Before the yuan can become a global currency, it must first be successful as a reserve currency... If they were priced in yuan, China would not have to worry so much about the dollar's value. All central banks would have to hold yuan as part of their foreign exchange reserves. The yuan would be in higher demand.
China does not have a floating exchange rate that is determined by market forces, as is the case with most advanced economies. Instead, it pegs its currency, the yuan (or renminbi), to the U.S. dollar... By keeping the yuan at artificially low levels, China makes its exports more competitive in the global marketplace.
And on cue, the headlines are again churning out new versions of the familiar fable. New plotlines include the economic fallout of a global pandemic as well as a âcapital warâ between the United States and China, in which Washington usurps Beijingâs traditionally lonely role as the imposer of the restrictions on how capital can move between their two countries, frightening global investors, who then forsake the fallen dollar. Taken at face value, the headlines suggest that the dollarâs long-awaited dethroning may be here at last
China is working on digital currency, the main benefits would be to replace fiat cash with a layer of traceable digital cash
ï»żChinaâs new central bank-backed digital currency termed DCEP
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Remember these previous articles
that you can re-read
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Remember the previous article that you can re-read upon request
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Chinaâs new central bank-backed digital currency termed
DCEP
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Has to Be...
Medium Of Exchange
Bitcoin, which has been around since 2009, has not yet reached this milestone. One major issue that undermines Bitcoin's use as a medium of exchange is its intense volatility. An example of this occurred in 2017, when the digital currency's price climbed almost 2,000 percent, rising from less than US$975 to nearly US$20,000. This sharp rally may have been great for investors, but the fact that Bitcoin experiences such intense price fluctuations lessens its use as a medium of exchange, which is one crucial element needed for it to function effectively as a currency.
Store Of Value
For Bitcoin to meet this requirement, it will need to hold value over the long-term. While some market observers believe that it's effective in this particular capacity, it's not unanimous.
Unit Of Account
The third requirement that Bitcoin needs to meet in order to function as a currency - and possibly replace the U.S. dollar as the world's reserve currency - is to function as a unit of account.
Summary
Bitcoin could potentially replace the U.S. dollar as the world's reserve currency, but for this to happen, the digital currency would need to make progress in several important areas.
Currencies serve as a medium of exchange, a store of value, and a unit of account. While the U.S. dollar has established itself well in these particular areas, some analysts have voiced their doubts that Bitcoin could fulfill these key roles.
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Confidence Represent Value Of Money |
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This disclaimer informs readers that the views, thoughts, and opinions expressed in the text belong solely to the author, and not necessarily to the author's employer, organization, committee or other group or individual.
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