What Determines The Value Of A Country’s Currency?
Money is not an organic creature but its value keeps changing with the society and its economic conditions. One rupee in 1947 is not the same as one rupee today, both in terms of appearance and purchasing power. Then what decides the value of a Country’s currency? Have a look!
All of you know that Gold is one of the most widely discussed metals due to its prominent role in both the investment and consumer world. If the gold is not in the country’s vaults the money becomes worthless or certainly of less worth. Rupee Value will be varied everyday based on other currencies.
Here are some important aspects to illustrate this relationship between gold and foreign exchange trading.
1. Gold was once used to back up fiat currencies.
As early as the Byzantine Empire, gold was used to support fiat currencies. Gold was also used as the world reserve currency up through most of the 20th century. Furthermore, many currencies were at one time or another pegged to gold or the so-called “gold standard.”
What Exactly Is the Gold Standard?
The gold standard is how countries tie the value of their currency to gold. Basically, they are willing to redeem that currency for its value in gold. This allowed the lightweight paper currency to be used for trade, instead of heavy gold bullion.
2. Gold is used to hedge against inflation.
Inflation is when the value of money steadily declines over time. It threatens the value of financial assets like stocks and bonds, and it, therefore, makes gold look more attractive as a store of value.
Many people keep gold to protect against inflationary pressures and to provide a means of exchange in tumultuous times that may depreciate the value of paper fiat currencies.
3. The price of gold affects countries that import and export it.
Ever give thought as to why our government is trying to incentivise exports and reduce imports? This is to protect our economy from high rupee depreciation.
The value of a nation’s currency is strongly tied to the value of its imports and exports. When a country imports more than it exports, the value of its currency will decline. On the other hand, Exports do the exact reverse.
Thus, a country that exports gold or has access to gold reserves will see an increase in the strength of its currency when gold prices increase.
4. How Gold price affects Interest rates?
Interest rates also correlate to the price of gold. Low-interest rates make it easy to choose gold as an alternative to bonds and other fixed-income investments, because they pay very little in income and have the risk of substantial decreases in value when rates rise.
Even though the gold standard has been abandoned (the global economy is now dependent upon floating exchange rates), gold as a commodity can act as a substitute for fiat currencies and be used as an effective hedge against inflation.
Other Factors that Determines the Value of a Country’s Currency:
The value of a currency depends on factors that affect the economy such as employment, growth rate, trade deficit, the performance of equity markets, foreign exchange reserves, macroeconomic policies, foreign investment inflows, banking capital, commodity prices and geopolitical conditions.