What is 'Currency Convertibility'

Currency convertibility is the ease with which a country's currency can be converted into gold or another currency. Currency convertibility is extremely important for international commerce. When a currency is inconvertible, it poses a risk and barrier to trade with foreigners who have no need for the domestic currency.

There tends to be a correlation between a countries economy and the convertibility of its currency. 

BREAKING DOWN 'Currency Convertibility'

Government restrictions can often result in a currency with a low convertibility. For example, a government with low reserves of hard foreign currency usually restricts currency convertibility because the government would not be in a position to intervene in the foreign exchange market (i.e. revalue, devalue) to support their own currency if and when necessary.

As global trade continues to increase currency convertibility has become more critical. Countries that currency has poor convertibility are at a natural disadvantage because transactions don't run as smoothly as hoped, which will deter other countries from engaging in trade with them. The flow-on effect from poor currency convertibility is slow economic growth. 

Currency convertibility requires a readily available supply of the physical currency which is why some countries impose capital controls on money leaving its country. As economies slump into recession investors will often seek investment offshore so to ensure money doesn't flood out of the country controls are placed. 

Currency Convertability and Capital Controls

Capital controls are most prevalent in emerging market countries due to the higher uncertainty in its economic outlook. As a result of the 1997 Asian financial crisis many countries in the area imposed tight capital controls to lessen the threat of a run on its currency in times of stress. Investors tend to flock to U.S. dollars as volatility rises, which sees the supply of its currency fall, weakening its convertibility. 

 

 

RELATED TERMS
  1. International Currency Converter

    An international currency converter converts the value of one ...
  2. Convertibles

    Convertibles are securities, such as bonds, that can be turned ...
  3. Currency

    Currency is a generally accepted form of money, including coins ...
  4. Convertible Arbitrage

    Convertible arbitrage is a trading strategy that involves taking ...
  5. Contingent Convertibles - CoCos

    Contingent convertibles (CoCos) are similar to traditional convertible ...
  6. Market Conversion Price

    The cost of converting a convertible security into a common stock, ...
Related Articles
  1. Investing

    Convertible bonds: pros and cons for companies and investors

    Understand what effect convertible bonds have on investors and companies. Find out the advantages, disadvantages, and what the issue means from a corporate standpoint before buying in.
  2. Investing

    3 Best High-Yielding Convertible Bond ETFs (CWB, ICVT)

    Discover how convertible bond ETFs can offer investors growth and income while hedging fixed income portfolios in a rising rate environment.
  3. Investing

    The Top 3 Convertible Bond ETFs for 2016 (CWB, ICVT)

    Obtain detailed information on the exchange-traded funds (ETFs) available for traders seeking ETF exposure to convertible bond investments.
  4. Investing

    Leverage Your Returns With A Convertible Hedge

    Find out how you can maintain your income stream by using this type of bond strategy.
  5. Trading

    Drastic Currency Changes: What's The Cause?

    Currency fluctuations often defy logic. Learn the trends and factors that result in these movements.
  6. Investing

    5 Ways To Invest In Currencies

    As the economies of some countries sputter and former third-world countries are beginning to emerge, currency investing is becoming more intriguing. Learn ways to make money on money with the ...
  7. Trading

    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.
  8. Investing

    Why This Convertible Bond ETF Is Surging

    This convertible bond ETF is delivering impressive returns, but it has some risks too.
RELATED FAQS
  1. Where Does Stock From Convertible Bonds Come From?

    Convertible bonds are considered a combination of debt and equity. Find out how a debt instrument converts into shares of ... Read Answer >>
  2. How Do Convertible and Reverse Bonds Differ?

    Determine the difference between a regular convertible bond and a reverse convertible bond, including how this is affected ... Read Answer >>
  3. Do convertible bonds have voting rights?

    Convertible bonds usually have no voting rights until they are converted. Even after conversion, they may not be granted ... Read Answer >>
Trading Center