And who determines the values of the currency?
The answer to the second part is easy. The value of the currency is determined by the buyers of the currency. These are mostly forex travelers, governments and traders. FOREX stands for currency. There are many factors that currency traders, governments, and businesses consider when determining the fair market value of a currency.
Fair market value is the price at which the willing buyer and the willing seller collect. The buyer has to take into account many elements and considerations in order to try to accurately estimate the value of the currency at any given moment. There are currently about 180 different currencies. Let's look at some of the factors that are used to determine the value of a currency.
Factors affecting the value of the currency:
1. Political conditions in the country – This includes the stability of the government, the degree of corruption, bribery and the degree of law and order. It also includes countries' relations with other countries, and in particular their relations with the United States, the United Kingdom, China and Russia. The form of government in the country is also a factor used to evaluate the value of a currency. Think of the many different forms of government in Saudi Arabia, China, the United Kingdom, Venezuela and Thailand, just to name a few.
2. Economic situation – This includes factors such as jobs, unemployment, work ethic, infrastructure, inflation and the direction of the economy. Whether it is older or newer in orientation; computers and high technology or more agriculture and production.
3. Outside Perceptions – The perceptions and attitudes of other countries towards a country are as important as the reality of the country's actual situation. News, media, movies, newspapers, rumors and spin can create perceptions. How much is known about a country? The less known, in general, the lower the value of the currency.
4. Demographics – Young people can mean better prospects for the future, people who are more open to change and development, and a growing workforce. The total population of a country is a factor. How much weight is this country on the world stage.
5. National leaders – The openness, reliability and likeness of visible leaders is a factor. This includes political leaders, sports figures, business owners and celebrities. Here are some national figures that affect their countries, either for better or for worse. Kim Jung Il, David Beckham, Nicole Kidman, Madonna, Osama bin Laden, Barack Obama and Vladimir Putin. They help to get a global perception of the country.
6. Isolation Against Openness – Continuous China is becoming more open, more transparent. It helps. Cuba is very closed and isolated. Venezuela is becoming increasingly isolated from some of its recent activities. Markets in China are becoming more open. Cuba, Kyrgyzstan, Russia and Japan have varying degrees of openness with the outside world, which affects the value of their currency.
7. Natural Resources – The type and amount of exploitation of a country's natural resources certainly helps to create an idea of the value or lack thereof of a currency. Extraction of minerals, forests, oil, fish and other resources is considered. Also the level of technology to develop these resources.
8. Weather factors such as drought, tsunami, earthquake and floods are taken into account. How often are they and how does the country react to them. They also influence the desire, safety and perception of a country. Is it a tourist destination?
9. War and Conflict – Which other country is at war with and which allies? Their military strength and technology, their willingness to go to war and what are the important factors in assessing the strength, stability and value of its currency.
10. Education – This includes spoken languages, level of computer know-how, internet connection, culture and religion. Scientists, entrepreneurs, authors and inventors are all affected by the type and quality of education in a country.
In conclusion, currency values are determined by many factors. Not just one question has to be considered, but a set of many. In currency trading, such as in FOREX, transactions are usually done in pairs. Values must be relative to something. So how one country is in relation to another country is also important. The most common Forex pairs are US dollars and Japanese yen, Euro and US dollars, for example. These and other factors determine the value of the currency. Some are tangible, some are intangible. Some are fixed and some are manageable. Sometimes this is news of the moment and sometimes a long-term situation. Therefore, currency values often change and there is no place or person to determine the currency values. And why currency exchange based on fluctuations in currency values can be an exciting, lucrative, volatile, fun or catastrophic form of business or investment.