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 most countries within the Eurozone. A core characteristic of most modern currencies is that the material comprising the currency itself - the paper in a dollar bill, for example - is essentially worthless, so that the whole of the currency's value is in its value as a medium of exchange. 

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 Ecuador 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, including cryptocurrencies such as Bitcoin and Litecoin​, 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 to which they are tied. Control over digital currencies is entirely decentralized, and the exchange rate of a digital currency can vary widely in a short period of time. 

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 are not allowed to be converted. 

RELATED TERMS
  1. International Currency Converter

    An international currency converter converts the value of one ...
  2. Key Currency

    A key currency used is money issued by stable, developed country ...
  3. National Currency

    A national currency is a legal tender issued by a central bank ...
  4. International Currency Exchange ...

    An international currency exchange rate is the rate at which ...
  5. Accounting Currency

    Accounting currency is the monetary unit used when recording ...
  6. Currency History

    Currency history is a term that refers to the values of a base ...
Related Articles
  1. 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.
  2. Insights

    Understanding The Currency Board vs Central Bank

    Each is different in their own way, but which system is better: the currency board or the central bank? Find out more about these systems in this article.
  3. Insights

    A Primer On Reserve Currencies

    For nearly a century, the U.S. dollar has served as the world's premier reserve currency, but the future is uncertain.
  4. 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 ...
  5. Trading

    How to Calculate an Exchange Rate

    Struggling to get a grasp on exchange rates? Here's what you need to know.
  6. Trading

    Forex market: Who trades currency and why

    The forex market has a lot of unique attributes that may come as a surprise for new traders. Learn more about who trades foreign currencies and why.
  7. Trading

    Dollarization Explained

    Find out how fledgling economies can find some stability in their currency and attract foreign investment.
  8. Trading

    The 6 Most-Traded Currencies And Why They're So Popular

    Regardless of the reason, forex is an integral part of 21st century finance. And the more widely used and reliable the currency, the greater the likelihood of people buying and selling it every ...
  9. Trading

    Hedging with currency swaps

    The wrong currency movement can crush positive portfolio returns. Find out how to hedge against it with currency swaps.
RELATED FAQS
  1. How are international exchange rates set?

    Knowing the value of your home currency in relation to different foreign currencies helps investors to analyze investments ... Read Answer >>
  2. How do national interest rates affect a currency's value and exchange rate?

    Generally, higher interest rates increase the value of a country's currency and lower interest rates tend to be unattractive ... Read Answer >>
  3. How does inflation affect the exchange rate between two nations?

    Countries attempt to balance interest rates and inflation, but the interrelationship between the two is complex and can influence ... Read Answer >>
  4. Why isn't the EUR/USD currency pair quoted as USD/EUR?

    In a currency pair, the first currency is called the base currency and the second is the quote currency, a longtime convention ... Read Answer >>
Trading Center