The world’s interconnected economies mean that understanding currency is more important than ever. Whether planning a trip abroad or making investments across national borders, knowing how different currencies compare is critical. Exchange rates, which show how a currency stacks up against another, can be affected by a variety of factors, including economic stability, interest rates, and global investment flows.
A currency is anything that society at large agrees has value and can be used to purchase goods or services. It can be paper, coins, beads, gold, lines of computer code, or whatever else people use to make transactions. Money is essential to a modern society, and it takes many forms, from the bills in your wallet to the cryptocurrencies you invest in.
Historically, a currency was backed by a commodity like silver or gold, but as countries grew richer and developed more sophisticated banking systems, they began to issue non-commodity currencies, known as fiat currencies. These are backed by nothing other than the government’s declaration that they have value.
In modern times, a currency is still largely determined by supply and demand. When a country’s economy is growing quickly, its currency tends to appreciate against other currencies; strong employment data can also strengthen a currency. Conversely, when a country is running large trade deficits, its currency may decline against other national currencies. This happens because foreign investors often seek to avoid high-risk investments in its currency, which can lead to inflation.