From Gold to Digital Wallets: Understanding the Key Drivers Behind Currency Valuation and Fluctuations
Gone are the days when people were using gold and silver coins for trading. The modern-age trading source is currency. The new generation doesn’t even know anything beyond currency.
People in a specific field may understand the reasons but for the common man, it’s a mystery why currencies rise and fall. They don’t know the certain factors that cause the increase of its value and decrease as well. Following is an effort to make it understand and help ordinary masses develop its understanding.
Real Value of the Currency:
Gold is supposed to be there behind the value of the currency of every country. In ancient times people used gold or silver coins for trading. Over time paper receipts were used to replace the coins because they were not easy to carry from one place to another.
This was the beginning of the paper money. Now we know that countries used to print paper money without having any gold in their banks. This causes inflation but this is another topic therefore not indulge in it for the time being.
In this modern world of today, people are even getting rid of paper money. Carrying cash with them is somewhat annoying. The world is moving to debit cards and credit cards. Anyhow it is in the interest of everybody to know about the reasons why currencies rise and fall. We are going to discuss its main reasons here.
Why Do Currencies Rise and Fall :
What causes currencies to rise and fall? Well, the best way to explain all this is if we go back in time to before the 2008 Olympics in Beijing. So we’re back in time now and the year is 2006. I met back then with a CFO of United Technologies which owned the OTIS elevator brand back then.
They spun it off a couple of years ago and he told me that based on their research and their order book in China, they are going to build more buildings than the cumulative total of all buildings ever built in every country since the beginning of time. He also told me that every single year the Chinese government builds the equivalent electricity grid infrastructure of the United Kingdom staggering statistics.
The Reason Behind Buying the Currency:
So the year is 2006 and let’s pretend I’m the Chinese government. Now if I want to build all this stuff to show the world how modern China was in 2008 at the Beijing Olympics then I have to buy a lot of natural resources like oil copper, Aluminum, iron ore, and many other raw materials.
Now three countries that I want to buy those aforementioned natural resources are Australia, Canada, and Brazil. Those three countries are very rich in natural resources.
So as the Chinese government if I have to buy anything from those three countries then what I have to do first is i have to exchange my currency which is the Renminbi.
I have to exchange my Renminbi and buy Canadian dollars, Australian dollars, or Brazilian real. I have to buy those three affirmation currencies because then I can use their currency to buy natural resources from companies in those countries.
So I’m buying a lot of those three currencies which drives up the value of those currencies a lot.
Interest Rate:
Now moving on to another sub-topic here with currencies another thing that makes currencies go up and down is when a country makes their interest rates go up or down by changing the supply of their money. So if countries decrease the supply of their money then the prices of that currency increase.
Meaning interest rates increase and investors want to invest if it has a higher interest rate than other currencies.
Stability of Economy:
But here’s the catch, it has to be a stable economy. Because when we see interest rates that are way too high for some bonds or currencies or dividends. If the dividend yield is way too high on a stock then there’s usually a reason.
The reason is that the company or the country could go bankrupt. So we always have to question why rates are high in a certain country.
Global Crisis:
Another reason why some currencies outperform others is scary global economic environments. Therefore, for example, if there’s a global crisis of confidence and investors want to invest in a safer currency.
Therefore in 2008 gold and bucks outperformed as a commodity, a little side note, when people are freaking out about the global economy usually the price of gold goes up a lot. So my favorite go-to investment when the world’s falling apart is usually gold.
I buy gold which is the ETF for it. The last thing I’ll say about currencies is of course it’s all relative to each other.
Conclusion:
These are some important and you can recon some basic factors to understand why currencies rise and fall. Many hypotheses will come false after understanding the reasons. Individuals, companies, and even countries invest in other underdeveloped countries for the sake of profit.
They all evaluate the above-mentioned factors through their experts and then go for it. Countries with strong currencies and low interest rates are considered the heaven for investors. Therefore, everyone must be aware of these factors.
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