What is National Currency?

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Banknotes and coins are the most common present-day types of currency. The US dollar (USD) is the currency of the United States, circulated by the US Federal Reserve. While most nations possess their own currency, some have embraced other country’s currency like Ecuador, Zimbabwe, and Panama. A few others, like members of the European Union, have adopted a common official currency, Euro.

Key Takeaways

  • The national currency is a government-issued legal tender used to buy or sell goods and services within an economy. The national currency of the United States is the US dollar (USD), also considered the strongest global currency. Inflation and interest rates impact the value of a national currency. Examples of national currencies are US Dollars, European Euro, British Pound Sterling, Japanese Yen, and Chinese Renminbi.

National Currency Explained

NC includes paper money and coins legally in circulation in a country. It is an integral part of a country’s identity and ensures its economic stability. Besides being a unit of exchange, it is also a sign of value and wealthWealthWealth refers to the overall value of assets, including tangible, intangible, and financial, accumulated by an individual, business, organization, or nation.read more.

The currency of a country and its financial wealth goes hand-in-hand. A strong or weak currency demonstrates a powerful or incompetent economic system, respectively. Likewise, a country’s monetary policyMonetary PolicyMonetary policy refers to the steps taken by a country’s central bank to control the money supply for economic stability. For example, policymakers manipulate money circulation for increasing employment, GDP, price stability by using tools such as interest rates, reserves, bonds, etc.read more influences its currency. 

The two major fiscal elements that affect the value of a currency are inflation ratesInflation RatesThe rate of inflation formula helps understand how much the price of goods and services in an economy has increased in a year. It is calculated by dividing the difference between two Consumer Price Indexes(CPI) by previous CPI and multiplying it by 100.read more and interest rates. Note that both components are interconnected with each other.  For example, low interest rates leave more money in the hands of people. This increases the demand for goods and services and contributes to economic growthEconomic GrowthEconomic growth refers to an increase in the aggregated production and market value of economic commodities and services in an economy over a specific period.read more. However, it may increase inflation.

To reduce inflation, central banks increase interest rates. With lesser money in hand, the demand for goods and services reduces, thus lowering their prices. In addition, high-interest rates attract foreign capital to a country, thereby increasing the demand for its currency.

Thus, a country with high-interest rates relishes increased profitability and a stronger currency than those with lower interest rates. Moreover, a country with a high inflation rate attracts investors seeking avenues to amplify returns. As a result, more investment makes the currency stronger.  

However, excessive inflation may adversely impact the country’s financial soundness and, consequently, the utility of its currency. Thus, it is essential to sustain a bearable inflation rate that supports growth. 

Trading of National Currencies 

Nations trade with one another. One currency has to be converted into another to execute transactions between them. Since currency has a value, it can be bought and sold as a commodity in the exchange market. Foreign exchange marketForeign Exchange MarketThe foreign exchange market is the world’s largest financial market that decides the exchange rate of currencies.read more facilities this conversion.

Forex market is a dispersed global commercial setting to manage the transactions of currencies at its prearranged exchange rates. It permits round-the-clock trading in pairs. Nevertheless, a currency trades proactively only throughout the country-specific usual market hours. 

This helps discover the value of a nation’s currency vis-à-vis the currency of another country. A strong currency is beneficial for exporters (sellers), while the importers (buyers) gain from a weak currency. 

The currency of countries like the US (USD), UK (Pound sterling), China (Renminbi), and Japan (Yen) maintain a strong value. This is because central banks worldwide hoard them in abundance to expedite international tradeInternational TradeInternational Trade refers to the trading or exchange of goods and or services across international borders. read more. Such currencies are called reserve currencies.

Their predominance in the global market makes the other countries tabs on the former’s monetary policies. Any change in inflation, stagflationStagflationStagflation is an economic scenario where stagnation coincides with inflation.read more, or interest rates influences the value of all currencies. Currently, the USD is designated as a global reserve currency. 

A currency is not an exclusive type of legal tender. However, it is the most basic exchange unit for commercial goods and services. 

Examples

Here is the list of the names and symbols of 13 national currencies. 

As per the latest Wall Street Journal report, El Salvador plans to designate Bitcoin as its national currency. It made the cryptocurrencyCryptocurrencyCryptocurrency refers to a technology that acts as a medium for facilitating the conduct of different financial transactions which are safe and secure. It is one of the tradable digital forms of money, allowing the person to send or receive the money from the other party without any help of the third party service.read more a legal tender in September 2021. The country is preparing to raise $1 billion through the first-ever bitcoin-backed sovereign bond. 

It is the first nation to have Bitcoin as a national currency. President Nayib Bukele has turned El Salvador into a real-life lab for cryptocurrency, making it the Singapore of Latin America. However, the International Monetary Fund (IMF) is unsure about the efficacy of this move as most country citizens still trade in USD.

Also, a recent survey conducted after this revolutionary move disclosed the dissent of 70% of respondents. Therefore, they consider this as an unreliable move. 

This has been a guide to National Currency. Check out the concept of national currency including name & symbol of currencies of countries like India & Japan. You may learn more about accounting from the following articles –

A – A strong national currency facilitates seamless international trading affairs without facing major outstanding debt. Also, a country with a strong currency enjoys domestic financial security, thereby experiencing low inflation.

A – Foreign exchange (Forex) marketplace regulates the trading of national currencies at agreed-upon exchange rates. It compares the value of one currency to another by 24×7 trading in pairs. While exporters benefit from a strong national currency, the importers benefit from a weaker currency.

A – The nine strongest national currencies are:1. US dollars2. European Euro3. Chinese Renminbi4. Japanese Yen5. British pound 6. Australian Dollars7. Canadian Dollars8. Swiss Franc9. South African Rand

A – Given its increasing market prevalence, it can be regarded as a national currency. Recently, El Salvador has even announced it as its national currency. However, its relevance in the Forex marketplace is yet to be seen as the IMF, and most countries are regarded as unreliable units.

  • Hard CurrencyHard CurrencyHard currency is a type of currency issued by countries that all investors and nations can rely on. read moreCurrency PairCurrency PairA currency pair is a combination of two different national currencies valued against one another. Its purpose is to compare the value of one particular nation’s currency to another.read moreReserve Currency