Importance of Foreign Currency

Currency is a mode of payment used to buy/sell goods and service between individuals and countries. The other aspect of money circulating in an economy is bank deposits. Currency was issued against a gold standard until early 1900s and then different criteria have been set up by central banks across the world to put money in circulation. The United States was the last company to give up the gold standard in 1971.

Who Controls a Country’s Money Supply?

In case of currency production, the central bank of every country has monopoly. This enables countries to fix exchange rates at which a foreign currency can be bought at a price. This price changes every day depending on number of factors. Several countries share a single name for currency as in case of Hongkong, Australia, Canada and the United States that have the same currency– dollar – but use different symbols to denote their currency.

Foreign Currency Conversion: The ability to buy and sell currency freely by a company, person or government without government permission depends on a number of factors. The Features of different of currencies in existence are explicated below:

  • Completely convertible: Government permission is not needed and no limitations are viable on the amount that is traded in open market. US Dollar is one such currency that is safe haven and most accepted mode of foreign currency payment in any country around the world. It is also the most traded currency worldwide.
  • Somewhat convertible: the central bank of a country controls investments into and out of a country. Incoming investments are welcomed and special permission is needed to buy large amounts of foreign exchange as the government has to approve the investment deals. The Rupee is one such example.
  • Non convertible currencies: They generally belong to embargoed countries like North Korea and Cuba as they do not participate in international exchanges the conversions off limits to people and companies.

Many countries keep big reserves of foreign currency as an investment tool – this enables them to pay for commodities like crude oil and foodgrains in case of necessity in the open market. It also enables them to pay major investments in several sectors. Every country’s economy goes through cyclical changes and for a while even the US Dollar looked shaky as it was in recession. The Euro zone is dealing with issues with member countries.

How Foreign Currency Investing is Done:

In India, the concept of foreign currency as an investment tool is not very popular. There are several hedge funds in the US and Europe which invests in currencies as an average investor would invest in Stocks, mutual funds, gold or real estate and even art.  Currently the Chinese Yuan/Renminbi is undervalued by 20% or more (according to experts) ad China wants to push their exports. One can buy and hold currency and sell it at a profit when the commodity is scarce and to make money. People are buying and holding it more in the last few years given the volatility in American and European markets. As with any investment, it can be a risky proposition to lose money in a volatile market.