Currencies are a system of payment that can be exchanged for goods and services. Currencies can vary by country or region.
What are currencies?
- Currencies are a system of payment that can be exchanged for goods and services.
- While most currencies are issued by governing entities, deregulated currencies like bitcoin and other cryptocurrencies exist.
- Exchange rates help value different currencies between countries.
Currencies are typically designed and managed by a government or other regulatory entity, such as how the U.S. Treasury and Federal Reserve create and manage the U.S. dollar. However, unregulated forms of currency exist as well, such as cryptocurrencies like bitcoin. Given how currency varies by region and/or creation, the valuation of each currency unit likewise varies. For instance, the U.S. dollar is not of equal value to the European euro. The differences in currency valuation depend on several factors. Inflation rates, interest rates, the issuing entity’s public debt, or even the economic status in the currency’s origin country can impact its value.
How currencies stack up against each other can also impact investment returns. For example, if a U.S. investor owns a security in another currency and if the value of the foreign currency decreases relative to the USD, then their overall return on the foreign investment will likewise decrease even if the investment’s actual performance remains static.