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Understanding How the Value of Money is Determined

Posted on 13. Mar, 2009 in Saving money

Have you ever been curious about how currencies locally and around the world are valued? Money is actually worth more than the paper it is printed upon or the material required to create coins. While some attention was placed upon the value of national currency by consumers in the past, with the growing popularity of the Forex market, more and more people are interested in learning how the value of money is actually determined.

Fiat Currency Fundamentals

The basic fundamental value of money is created by the governing bodies of the particular countries. Money itself does not actually have an intrinsic value, meaning that it is not made out of a valuable material. Therefore, the amount that money is worth is accepted as currency when a government dictates it to be accepted as such. While this principle does not govern the day to day value of currency, it is the fundamental reason that governs why money has value at all.

The Local Government

The government has a hand in determining the value of its national currency. Based upon fiat policy which was just discussed, individual governments are in a sense backing or guaranteeing their currency to both their own citizens and to the citizens of the entire global economy. So, national events and the state of the particular national economy will drive the value of the associated currency up or down. For example, the national budget, the interest rates of the world and central banks and any applicable national debt can all impact the value of money.

The Global Market

Last but not least, the global market directly impacts the value of national currency. Within the Forex market, currencies are actually treated as and traded as commodities. As individual and institutional investors bet on the direction that national currency values will go, the overall prices of both currencies paired against each other are affected. And, investors are able to capitalize on the movements in currency when they choose the correct movements of the paired currencies. The market value of currency affects primarily the value of the local currency when travelling and when conducting business in foreign currencies. So, when the local currency is weakened against a global currency, the local citizens will have a reduced buying power when purchasing products in the other currency.
The value of currencies changes daily as the market experiences trading volume. The Forex market is the largest market in the world, with trillions of dollars changing hands daily. And in addition to the Forex market, as mentioned earlier, the local economy’s health will drastically impact the value of its currency.

Tags: currency, Forex, value of money