Understanding Currency Types and Functions

A currency is defined as currency in its most general sense, the currency that is used as the universal unit of account for all nations. In layman’s terms, a currency is any currency that is normally accepted at the place of business or trade. The use of currency is fundamental to the smooth functioning of international trade. This facilitates the movement of goods and services throughout the world and facilitates the transfer of money as well. The function of currency is so pervasive that without the provision of currency, the global market would not be able to function properly.

In layman’s terms, currency refers to an item of value that is bought and sold on the world market. For instance, if you are planning to buy a British Pound at 1 pound Sterling, then the transaction will be translated as equivalent to US Dollars with the exchange rate being the value of the British Pound to the US Dollar. A similar situation happens when you wish to sell a Canadian Dollar for US Dollars. There are other important terms to be familiar with that will enable you to trade on the foreign exchange market.

The base currency is the unit of account that is usually followed by all other currencies. This includes the Euro, the Japanese Yen, the Australian Dollar and the Swiss Franc. Among these, the Euro is the common base for the monetary transactions across Europe. It is the major mode of payment for goods and services performed in the European Union as well as among the countries that constitute this economic area.

In addition, there are several other major currencies that are traded on the Forex trading market. They include the GBP/USD (sterling pound/dollar), the CHF/USD (Swiss franc/dollar), the AUD/USD (Australia dollar/dollar), the NZD/USD (New Zealand dollar/dollar) and the NZD/JPY (Norwegian kronen). If you want to know about the different monetary units or the different ways by which you can buy and sell these currencies, you should read the following main article about Forex. In this article, you will see complete definition of currency types and their functions in the international monetary system.

Currency Conversions – The first currency that is generally exchanged on the Forex market is the U.S. dollar. When we talk about exchanging currencies, the principal is always monetary. When we are talking about the conversion of one currency to another, usually the principal currency is changed to the foreign currency that is stronger in terms of economic strength. For example, if you wish to buy U.S. dollars and you are living in a country that is economically weak, then it would be more logical to buy the British pound (GBP) than the dollar.

Virtual Currencies – Another kind of currency is the virtual currency. This can be done through online foreign exchange brokers. The virtual currency is based on the same theories that you find in the real foreign exchange market but there is no physical gold or silver involved. Instead, virtual currencies are based on the same technologies and processes that you find in a computer network. Therefore, virtual currencies are the ones that you will encounter most often when you access the foreign exchange market through online brokers.