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Rates updated: 2017-08-19 - EST time 10:56:03am
Top 33 World Currencies against 1 USD

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Exchange Rates: Determining Monetary Value

A good portion of the world is concerned with and run by the concept of opportunity cost. That is, in order to attain one thing, be it an object or a service, an equal exchange must be made. In the science of economics, the concept of equal trade is adequately represented by the zero-sum game, which explains that a person’s gains are directly proportionate to the losses of the utility of the other person and vice versa. Mathematically speaking, if the sum of all gains were to be subtracted to or from the sum of all losses, it would equate to 0 (zero). At least, this would be an ideal scenario. Putting this in a more relatable perspective, the above conditions explain that most things are not for free. The work and effort exerted in making a certain commodity available to the public should be rewarded with something that has been deemed to be of equal value.

Modern Transactions

Ever since the development of banknotes, a type of currency, exchange of goods has become more systematic. These said banknotes are firmly established representations of value. It is used in modern times to purchase a good or a service. However, the worth of a single unit of money in one country may differ from other countries. Currency is derived from the Middle English term ‘curraunt,’ which means ‘in circulation.’ It is a generally accepted system of money which is utilized as a medium of exchange within a certain economy.

International Commerce

Each country has its own established currency – one that has been recognized and formally implemented by the government. Japan, for example, utilizes yen. India uses the rupee and Guatemala’s official currency is the quetzal. These are typically represented by a main currency unit (e.g. won, pound sterling or dollar) along with a fractional unit, which is presented as 1/100 (one hundredths) of the main unit. Smaller denominations, such as 1/1,000 or 1/10 are also used, though less frequently. Conversely, there are also countries that do not utilize fractional units, like Iceland. In order to purchase a commodity in a foreign country with a different currency, one’s money must be converted to that country’s own form of legal tender.

These units have specific, yet constantly shifting, values assigned to them. The more developed the nation, the higher the value of its currency. Exchange of money between these differing countries or amongst foreigners and natives is based upon internationally recognized values known as ‘exchange rates.’ More specifically, these are the prices as to which one country’s legal tender can be swapped for another and vice versa. There are two types: fixed and floating. The former is determined by government action – it intercedes in the market with the purpose of buying or selling their legal tender (with regards to supply and demand) at a set value, whereas the latter refers to day-to-day shifts in these rates that are influenced by the world market. Before engaging in currency exchange, know that some countries share the same name for their currencies, yet have differing values.

Argentina and Mexico both use pesos as their fiat money, but the Argentine peso is worth more than a Mexican peso (the difference usually ranges from 60 to 70 centavos). In the same sense, not all dollars have exactly the same value; some are worth more than others. Take, for example, the US dollar in comparison to the Australian dollar. The former has a slightly higher value than its Australian counterpart. There are also cases wherein multiple countries utilize exactly the same currency. A well known example would be the euro. It is the lone currency used in 18 European countries, namely France, Spain, Cyprus, Malta, Austria, Germany, Slovenia, Luxembourg, Belgium, the Netherlands, Greece, Slovakia, Estonia, Italy, Finland, Portugal, Latvia and Ireland. Similarly, countries such as Ecuador and East Timor have promulgated the use of the US dollar as their official currency.

Currency Convertibility

This refers to the ease of which a locale’s monetary unit can be converted into another kind of legal tender. This is manifested through varying degrees of convertibility, which are listed below:

Fully Convertible If any amount of cash can be freely used in international commerce, without legally instituted constraints, it is considered fully convertible. A popular example would be the US dollar. It is for this reason (the versatility of this currency) that dollars are amongst the most widely traded monetary units in the market.

Partially Convertible
A country’s monetary reserves are regulated by central banks. Although majority of in-country transactions are made without any preconditions, central banks pose significant limitations to international interactions. Before proceeding to a currency converter, one must first gain the approval of the necessary authorities to continue with international commerce. An example of a partially convertible legal tender is the Indian rupee.

Internationally closed off countries, such as North Korea and Cuba, have nonconvertible currencies. This means that they have no established exchange rates as it is against their law to engage in globally interactive activities. Consequently, the Forex (foreign exchange) market recognizes their monetary units as ‘blocked currencies.’

Production and Circulation

In most cases, money is issued by a central bank. It has monopoly over the regulation, distribution and production of fiat money within a nation or cluster of nations that use this certain unit. It controls the frequency and amount produced by banks through a system called monetary policy. There are also circumstances in which countries have control of their own currency. It is managed by a nationally recognized establishment, either a Ministry of Finance or a central bank, which is known as the ‘monetary authority.’ The scope of its autonomy differs from place to place, depending on the government that founded it. In America, the Federal Reserve System has a relatively high degree of autonomy. By practice, the executive or legislative branches need not directly oversee its operations.

Rules of the Currency Converter

Multiple elements are responsible for the constant shifts of monetary value in ‘floating’ regimes. These factors that influence exchange rates are divided into three main categories:

Economic Conditions

The way a government manages the economy proportionately influences the value of its national currency. Typically, the market responds positively to a healthy and productive economy. Currencies strengthen with high or rising employment levels, gross domestic product, capacity utilization, good trade flow and the like. In contrast, inflation, increasing budget deficits and trade deficits deter the value of a nation’s money.

Political Factors

Similarly, political stability also takes its toll on exchange rates. The level of stability of a government reflects on the value of its currency. Take, for example, the case of two coalition governments (e.g. Thailand and Pakistan). Destabilization of such will result in a subsequent depreciation of their respective currencies

Market Psychology

Currency markets are more concerned with long-term trends, which are influenced by a nation’s overall status. Countries that have garnered an ill reputation or have recently experienced internationally known unsettling events are bound to have reduced monetary value. Assets that were invested here will then be transferred to more secure “havens.” Traditionally, U.K.’s pound sterling and the U.S. dollar have been considered such. Moreover, traders make out patterns formed by currency pairs (e.g. the Canadian dollar and the US dollar). These aggregated price developments are analyzed for future reference.