How are currency values determined?
And who determines the values of the coins?
The answer to the second part is easy. The value of the coin is determined by the buyers of the coin. These are mainly travellers, governments and Forex traders. FOREX stands for Foreign Exchange. There are many factors that forex traders, governments and companies take into account in determining the fair market value of a currency.
Fair market value is the price at which a willing buyer and a willing seller come together. The buyer must take into account many elements and considerations in trying to accurately assess the value of a coin at any given time. There are approximately 180 different currencies in the world now. Let’s consider some of the factors that are used to determine the value of a coin.
Factors that affect the value of the coin:
1. Political Conditions in the Country – This includes the stability of the government, the amount of corruption, bribery, and the degree of law and order. It also includes a country’s relations with other countries and especially its relationship with the US, UK, China and Russia. The form of government in the country is also a factor that is used to assess the value of a currency. Consider the widely varied 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 direction of the economy. Is it older or newer in orientation? computers and high technology, or more agriculture and manufacturing.
3. Perception from abroad – The perceptions and attitudes of other countries towards a country are as important as the reality of the actual situation in the country. News, media, movies, newspapers, rumors, and spins can all create perceptions. How much is known about a country? The less one knows, generally, the lower the value of a coin.
4. Demographics: A young population can mean better prospects for the future, people more open to change and development, and a growing size of the workforce. The total population of a country is one factor. How much weight does this country have on the world scene.
5. National Leaders – The openness, trustworthiness and friendliness of visible leaders is a factor. This includes political leaders, athletes, businessmen 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. These help shape the world’s perception of a country.
6. Isolation versus Openness – Continuum China is becoming more open, more transparent. This helps. Cuba is very closed and isolated. Venezuela is becoming more isolated by some of its recent actions. China’s markets are opening up more and more. Cuba, Kyrgyzstan, Russia and Japan have different levels 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 create a perception of the value, or lack thereof, of a country’s currency. The mining of minerals, forests, oil, fishing and other resources is considered. Also the level of technology to develop these resources.
8. Meteorological factors such as droughts, tsunamis, earthquakes and floods are taken into account. How frequent are they and how is the country’s response to them? These also affect the convenience, security and perception of a country. Is it a tourist destination?
9. War and conflicts – What other country is it at war with and who are its allies? Their military strength and technology, their willingness to go to war and why, are important factors in evaluating a country’s strength, stability and value of its currency.
10 Education – This includes the languages you speak, level of computer literacy, internet connection, culture and religion. Scientists, entrepreneurs, authors and inventors are affected by the type and quality of education in a country.
In conclusion, currency values are determined by many factors. It should not be considered a single problem, but a combination of many. In currency trading, like in FOREX, transactions are usually done in pairs. Values must be relative to something. So how one country is doing relative to another country is also significant. Common currency pairs are the US dollar and the Japanese yen, the euro and the US dollar, for example. These and other factors determine the value of a coin. Some are tangible, some intangible. Some are fixed and some are manageable. Sometimes it’s the breaking news and sometimes the long-term situation. This is why coin values often change and there is no single place or person that determines coin values. And why currency trading, based on fluctuating currency values, can be an exciting, lucrative, volatile, fun, or disastrous form of business or investment.