Essay on Floating Currencies and Exchange Manipulation

Submitted By Snic2dog
Words: 1880
Pages: 8

Floating Currencies and Exchange Manipulation Money makes the world go round. Currency, one could argue, is like a religion; belief in the power of a specific type of currency can empower it, or reduce it to shambles within a remarkably short period of time. Regardless of how much power a currency has, there has to be belief in it from its user population to give it value or it remains exactly what it is—paper and ink. Of the 193 states of the world, there are almost an equivalent number of currencies that exist in the international market. Why is that, if there are so many currencies that exist in the foreign exchange market but only 6 of them are so wildly popular (Investopedia)? Money is how the world is able to quanitfy the value of the goods that are being traded, and these 6 currencies (US Dollar, Euro, Japanese Yen, British Pound, Swiss Franc, & Canadian Dollar) happened to become the global norm for valuing the world’s worth. In essence, currency is the financier of the processes of globalization. Currencies on the foreign exchange market and that used for payment or trade are subject to the swaying will of floating exchange rates, translation or transaction exposure, and the potential to be manipulated by countries seeking a deep personal gain. It is imperative that countries and trade unions (such as the United States and EU) recognize the occurance of currency and trading phenomena, so that they may immediately enact preventative measures to avoid and repair the downfalls they reap. To gain better understanding of the foreign exchange, or forex, markets it is necessary to ask: what is currency? According to Merriam-Webster, currency is “something (as coins, treasury notes, and banknotes) that is in circulation as a medium of exchange,” (Merriam-Webster, 2012). Currency in the form of notes and coins became the global norm because the bartering system is inefficient on an international scale. Who is to say that my 3 chickens are equal to his pair of shoes? There is no way to quantify what is being exchanged in the trade using bartering only. Currency is a well-known, measurable form of value of goods and services. Currency, US dollars in this specific example, can be traded for goods and services or other global currencies. Currency exchange is a very necessary service due to the fact that the world trades on a massive global scale. For example, an American cannot travel to Paris and pay for lunch in US dollars because it is not the locally accepted currency. The American tourist would be forced to exchange US dollars for local Euro so that they could then purchase goods in the local marketplace. Investopedia, a personal finance and investment websource, says; “The need to exchange currencies is the primary reason why the forex market is the largest, most liquid financial market in the world. It dwarfs other markets in size, even the stock market, with an average traded value of around U.S. $2,000 billion per day.” (Investopedia)
With statistics like those Investopedia presented, it can be argued that foreign currency exchange is just as (if not, more) important of a market than traditional trade. However, unlike the trading of goods, forex is subject to more volatile conditions due to the fact that the value of currency relies almost solely on belief and confidence. Instability and distrust can destroy the value of entire nations in an instant. Currencies exist in an heavily regulated market. In fact, many currencies have limitations as to what they can be converted into or if they can be converted at all. The majority of monies are freely convertible, meaning that the government of the holding country allows both residents and non-residents to purchase unlimited amounts of it (Hill, 332). When a currency “floats”, that means that a currency’s value is allowed to fluctuate with the market, like when confidence is high or low in the forex. When a currency swap (simultaneous purchase and sale of