Currency

What is 'Currency'

Currency is a generally accepted form of money, including coins and paper notes, which is issued by a government and circulated within an economy. Used as a medium of exchange for goods and services, currency is the basis for trade.

BREAKING DOWN 'Currency'

Generally speaking, each country has its own currency. For example, Switzerland's official currency is the Swiss franc, and Japan's official currency is the yen. An exception would be the euro, which is used as the currency for several European countries. While these currencies can be specific to a nation, other countries have declared foreign currency to be legal tender in their own country. For example, El Salvador and Panama allow the use of the U.S. dollar as legal tender, and immediately after the founding of the U.S. mint in 1792, U.S. residents used Spanish coins because they were heavier.

Some currencies, like cryptocurrencies​, bitcoin​, dogecoin​ and other online currencies and branded currencies are not tied to any country. Branded currencies, like airline and credit card points, or in-game credits are valued in relationship to the value of the products or services they’re tied to. Control over digital currencies is entirely decentralized, and the exchange rate of a digital currency can vary widely in a short period of time. 

Local currencies are currencies intended for trade over a small area and aren’t nationally backed. There are a wide variety of local currencies within the United States, which itself has a history of local currencies before the establishment of state and national banks. Other instances in which local currencies have been used include a kind of quasi local currency in the form of local government IOUs that have been used as currency. 

In most all cases, the central bank of a country has the sole right to issue money for circulation. Along with a main unit of currency, these banks issue fractional units, usually in the form of coins. These usually show up as 1/100th, and 1/4th, but can at times be as small as 1/1000th of the main unit of currency.

Investors often trade currency on the foreign exchange market, which is one of the most heavily traded markets in the world. An exchange rate is the rate at which two currencies can be exchanged against each other. These rates can be ‘floating’ or ‘fixed’; floating being that the value of the currency changes in relationship to foreign exchange market mechanisms, fixed currency is currency tied to another currency like gold or a currency basket.

Most currencies, like the U.S. dollar can be traded (or converted) for another currency in a money market. Individuals, like international tourists, who want to trade hard currency usually do so at an exchange window or at a bank without any restriction or artificially imposed fixed value. These currencies are considered fully convertible. Partially convertible currencies are currencies that a central bank controls. Central banks sometimes do this to control hot money flows and international investment. Non-convertible currencies are currencies that don’t participate in the foreign exchange market and aren’t allowed to be converted. 

RELATED TERMS
  1. International Currency Exchange ...

    The rate at which two currencies in the market can be exchanged. ...
  2. Currency Pair

    The quotation and pricing structure of the currencies traded ...
  3. Currency Board

    A monetary authority that makes decisions about the valuation ...
  4. Dollar Rate

    The exchange rate of a currency against the U.S. dollar (USD). ...
  5. Universal Currency Converter

    A program that allows for the quick conversion of currencies ...
  6. Counter Currency

    The currency used as the reference or second currency in a currency ...
Related Articles
  1. Term

    Why Countries Keep Reserve Currency

    Central banks and financial institutions hold large amounts of foreign money as their reserve currency.
  2. Forex Education

    Forex Tutorial: Reading a Forex Quote and Understanding the Jargon

    One of the biggest sources of confusion for those new to the currency market is the standard for quoting currencies. In this section, we'll go over currency quotations and how they work in ...
  3. Forex Fundamentals

    The Effects Of Currency Fluctuations On The Economy

    Currency fluctuations are a natural outcome of the floating exchange rate system that is the norm for most major economies. The exchange rate of one currency versus the other is influenced by ...
  4. Investing Basics

    Explaining Fixed Exchange Rates

    A government using a fixed exchange rate has linked the value of its currency to the value of another country’s currency, or the price of gold.
  5. Economics

    How Currency Works

    Currency offers key advantages over economies based on direct trade. It provides sellers with a broader market for their goods and services, and provides a durable asset with which people can ...
  6. Forex Education

    Top 5 Hardest-Hit Currencies

    The value of a country's currency is dependent on many factors that will cause it to fluctuate, relative to other world currencies.
  7. Mutual Funds & ETFs

    Protect Your Foreign Investments From Currency Risk

    Hedging against currency risk can add a level of safety to your offshore investments.
  8. Forex Education

    How Are International Exchange Rates Set?

    International exchange rates show how much one unit of a currency can be exchanged for another currency.
  9. Forex Education

    4 Of The Most Popular Traded Currencies

    Every day, trillions of dollars trade in the forex market. Here are a few of the most popular currencies, and some characteristics for each.
  10. Forex Fundamentals

    Understanding the Floating Exchange Rate

    Floating exchange rate is the exchange rate between two currencies at any given time.
RELATED FAQS
  1. What is foreign exchange?

    Foreign exchange, or Forex, is the conversion of one country's currency into that of another. In a free economy, a country's ... Read Answer >>
  2. How are international exchange rates set?

    International currency exchange rates display how much one unit of a currency can be exchanged for another currency. Currency ... Read Answer >>
  3. Why is the U.S. dollar shown on the top of some currency pairs and on the bottom ...

    All currencies are traded in pairs. The first currency in the pair is called the base currency while the second is called ... Read Answer >>
  4. What are key economic factors that can cause currency depreciation in a country?

    Read about the causes of currency devaluation, and find out how to differentiate between relative and absolute currency devaluation. Read Answer >>
  5. Is there a world currency? If so, what is it?

    There is no such thing as a world currency. However, since World War II, the dominant or reserve currency of the world has ... Read Answer >>
  6. How does inflation affect the exchange rate between two nations?

    Understand how inflation can affect foreign exchange rates of a currency and how it is just one of many economic factors ... Read Answer >>
Hot Definitions
  1. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  2. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  3. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  4. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  5. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  6. Sharing Economy

    An economic model in which individuals are able to borrow or rent assets owned by someone else.
Trading Center