National Currency

A national currency (NC) is any form of money used by the people of a nation as a medium of exchange to engage in economic transactions. It is a legal tender issued and regulated by a country’s central bank or monetary authority. US Dollars (US$), Pounds Sterling (£), Euros (€), Japanese Yen (¥) and Indian Rupee (₹) are examples of national currencies.

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 based on their respective national currency act, 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.

• 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 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 wealth.

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 policy influences its currency. 

Possessing a currency helps the government to pursue national economic objectives. By controlling its supply and valuation, the government can rein in inflation and prevent unemployment. For instance, a country going through a financial crisis can devalue its own currency to make its goods and service more attractive to foreign buyers. 

The two major fiscal elements that affect the value of any currency on the currency list are inflation rates 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 growth. 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.

It is a well-established fact that 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 market 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. The printing of these currencies however, is based on the national currency act of each country.

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 trade. 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, stagflation, 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. 

Despite most countries having an official currency based on their individual national currency acts, a few countries adopt other currencies to fit their requirements.

It is also a common factor of contemplation why these countries also have a symbol denoting their currency. For instance, the US Dollar is denoted by $, Indian Rupee is denoted by ₹, and Sterling Pounds are denoted by £.

These graphical representations of currencies is for easy identification and avoiding confusion while listing on foreign exchange. Moreover, each currency also has an assigned code and a currency code symbol that is used on currency exchange markets.

Let us understand the currencies of the world on the national currency list to see the default denominations of the governments of the world. This shall also give us insights into the strength of a few currencies above others. . 

As per the latest Wall Street Journal report, El Salvador plans to designate Bitcoin as its national currency. It made the cryptocurrency 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. 

The foreign exchange market is considered to be the most liquid market in the world and given that fact that it operates 24/7, the trading activity is on most of the times. Moreover, buying and selling on this market usually happens with marginal differences and therefore, the risk factor is minimal in comparison to other markets.

The major reasons why people exchange currencies from the national currency list include travelling to a foreign country, sponsoring education abroad, business payments and receipts, and brokers who exchange currencies on behalf of others.

This has been a guide to what is National Currency. Here we explain the its symbols, exchange, examples, and trading in detail. You may learn more about accounting from the following articles –

• Hard Currency
• Currency Pair
• Reserve Currency