How can the value of a currency go up or down? Surely £1 will always be worth £1 and $1 will always be worth $1?
In: Economics
What other answers mostly missing is a free markets. Firstly, usually every currency have a bank that prints new banknotes. This bank (called emitent bank) then gives loans to other banks, which will give loans to companies or people, or government to do it’s business. Each loan have it’s interest and this interest partially defines inflation rate (but emitent bank can’t just make some random interest rate, because that will probably cause economic collapse, instead emitent bank analyzes current economic state in country and world and tries to guess optimal interest rate). Inflation reduces value of currency, because as amount of this currency getting larger, world is less and less interested in it). Different currencies have different inflation levels, therefore some currencies values in other currency getting lower and lower. This has been said by other users.
But inflation and overall economic state of country depends largely on international trade. If you produce more goods than you buy, or if you buy raw materials and produce some demanded goods from them, therefore increasing value of your goods, then your country accumulated more and more foreign currencies, and more other countries accumulates your currency, which leads to demand of your currency, which increases it’s value. And vise versa – if your country labor efficiency is lower than that of the whole world, if your country buys more than it can afford, than it sales, then it’s currency is less and less valuable and it’s economic suffers. Also, there’s investment interests. If some rich people believes that some projects or companies in your country will be profitable, they can loan money to them, but for that they’ll need to exchange their money to your local money and that will increase it’s value. So, the more investors interested to do business in your country the more your currency grows compared to other, and vise-versa – if investors taking their assets from your country, then currency of your contry returns to your contry and overwhelms your local markets, which increase inflation and lowers currency value.
Basically, currency is like a blood of the country. It should be enough for it’s needs and it should flow from place to place, both too small or too many, or slowing money flow will lead to serious issues. But unlike blood, it should be exchanged for other currencies to show it’s value, to be more valued. Economic perturbances which leads either to shortage or overfilling of currency on any market (local or global) leads to all sorts of economical troubles and devalues currency.
TL;DR: the more foreign trade some country have – the less it’s currency inflation and therefore the more it’s value grows compared to other currencies. Shrinking foreign trade or investments means rapid inflation growth and rapid devaluation of it’s currency.
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