How is the value of currency determined?

How is the value of currency determined?

The value of a country's currency and its exchange rates are determined by factors such as the import-export ratio, trade volume, financial contribution, and performance on the international stage. The value and exchange rates of a nation's currency determine both its economic health and growth. Lower exchange rates have a favorable effect by enabling more expensive exports and more affordable imports of foreign goods. Higher exchange rates have a negative influence on a country, which will manifest in cheaper exports and expensive imports.

The number of imports and exports as well as the frequency of commerce will also determine the value of the currency The value of commodities, precious metals, stocks, and other assets is determined by exchange rates, but the financial worth and national development of a nation are dependent on changes in exchange rates, and global investments are made in response to those changes.

There are numerous factors like natural calamities, global relationships, inflation and economic growth of the country also determine the value of the currency. The economic growth of the country depends upon the ratio of imports and exports which is directly correlated with the supply and demand of its goods and services.

Initially, the currency is introduced to replace the barter system in a way to address the complexities and inconveniences existing in the traditional barter system. This type of money is called commodity money which is valued by the material in which the coin is minted. Later, the physical and political situations became a hurdle to minting such commodity money which is usually minted with gold, silver, and other precious metals.

The value of the money is determined by the value of the material that is used to mint. To overcome the hurdle global nations decided to create a representative currency that is backed by a country's gold reserves and the value of the currency is determined by the volume of reserves held by a country. The inflation and volatile market conditions created the demand for gold which left the country with an inability to print more currencies while they had fewer reserves.

As time and market conditions evolved, the economy has begun to rely upon fiat currency which is determined by the supply of goods and services. This created the freedom to print money with based on the creditworthiness of the issuing government which eased the government to face financial crises. In this case, The increase in demand increases the currency value and the increase in supply decreases the currency value.

There are other few factors that also determine the value of the currency.

Interest Rates

Countries that offer higher interest rates for its currency tend to increase its value. This increase in value is because of the fixed-income investors who make investments for higher interests which eventually creates demand for the currency and increases its value in the global market. Interest rates play a huge role in the growth of the currency value and also increase the country’s economy.


Inflation is one of the crucial factors that decrease the value of the currency. The increase in the inflation rate will decrease the value of the currency and also increase the price of domestic goods. A higher inflation rate will decrease the purchasing power of international goods. This also makes the country increase its imports and reduce its exports which affect the currency value in the global market

Capital Flow

Capital Flow indicates the proportion of the demand for the currency in large volumes. A large amount of capital flow in a country increases the value of the currency. Contrarily, A large amount of capital outflow depreciates the value of the currency.

Trade and Currency Supply

An increase in trade volume will reveal market demand for a nation's exports. Foreign investments will occur more frequently and exchange rates will rise as a result of increased demand for the nation's products.

If a country's import ratio is higher than its export ratio, it will lose financial value on the world market and foreign nations will be less likely to be interested in investing there. The supply of currency within the country also determines its own value. The higher supply of currency in a country at any given time will also decrease the value of the currency.

Calculating the value of currency

The value of a currency can be calculated by its convertibility to other currencies and its liquidity in the global market. The majority of the currencies in the globe adopted any of these common exchange rate systems. They are,

Fixed Exchange Rate

If a country follows a fixed exchange rate, its currency value will be pegged to an anchor currency by which both currencies will move identically. This method is commonly followed by developing nations that seek to maintain stability for its currency in the global market.

The drawback of fixed exchange rates is a lack of policy independence, lower free trade, and illiquidity. The most recognized currency that follows the Fixed Exchange Rate is the US dollar which is relatively stable among the other global currencies.

Floating Exchange Rates

In this method, The value of a currency is determined by the foreign exchange market which is evaluated with respect to the supply and demand of the currency in the global market. Countries that follow the floating exchange rate method will experience a huge volatility in its currency value but it gets benefited from autonomy over their economic policies and will experience higher liquidity.

Determining the exchange rates are extremely complicated mechanisms that include numerous factors that decide the growth of the country’s economy and its currency. While there are numerous factors to determine the currency value and its exchange rates, Teeparam Exchange offers the best way to transfer it across international borders efficiently by saving your hard-earned money from hefty transactional charges imposed by many international exchange service providers available in the market.

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And to conclude these are the major factors that determine the value of a currency in the International Market and due the fluctuation in value of currency we are also witnessing change in exchange rate. In simple terms value of a currency is also a great factor in determining exchange rates. Despite all these, we at Teeparam Exchange are providing the highest exchange rates in the UK market. That to our sri lanka exchange rate is the definitely better than our competitors.