Updated : Jun 27, 2020 in Uncategorized

What is a Currency?

At one time, the word “currency” referred to a unit of value. This unit was often defined as an item that could be exchanged for another and represented a unit of account of an entity.

Currency

In today’s world, currency refers to the standard to which a country’s currency is pegged to. For example, the Euro is pegged to the U.S. dollar.

To learn about how the Euro and U.S. Dollar are traded in Europe, we must first explore what each represents. Let’s start with the U.S. dollar.

The U.S. dollar is basically a “certified promise to pay” (or “cheque”). To demonstrate this, let’s take a quick look at a few examples of currency instruments. We’ll compare our primary money (USD) to other currencies.

First, let’s take a look at the Euro. It is the official currency of the European Union. Its main purpose is to trade with the other major currencies of the world. With that said, there are many ways the Euro can be exchanged for other currencies.

As for the Euro itself, it is accepted almost everywhere in Europe. The Euro is also pegged to the U.S. dollar. In other words, when one is exchanging U.S. dollars for Euros, the two are essentially pegged to each other. This allows for these two currencies to “trade” directly.

Now, we’ll take a look at the U.S. dollar. We can easily understand why the US dollar has the status of the world’s reserve currency. The US dollar is literally the “world’s reserve currency.”

It is because ofits primary means of exchange and its ability to preserve its value as a currency even during times of economic turmoil. In this sense, the U.S. dollar is an ideal store of value, or “currency” in our market economy.

Next, let’s take a look at the Euro. This is the second largest currency on the planet. However, it is not necessarily “used as” the world’s reserve currency.

Due to its volatility, the Euro has its problems being traded as a direct standard. The Euro can be traded as a secondary standard. There are certain countries that use the Euro as a primary standard.

There are some who only use the US dollar as a primary standard. These people usually own U.S. Dollars instead of Euros and you will often see them using them as their international money.

The point of this article is that while the US dollar may be the world’s “primary means of exchange”, the Euro and the U.S. dollar are also more stable than the Euro. The US dollar is, however, still used as a “store of value” because of its primary nature.