As people across the globe become more connected now than ever, foreign exchange gains importance for each one of us. You need to have a clear grasp of the workings of foreign exchange and you would be just fine in any land at any time.
First trade involved people across the world and then culture. With globalization, more and more countries are opening up. We are more involved with people from other countries. In the era of the internet, nobody seems far away. Tourism has grown exponentially and so has economic exchange. Markets are no longer just local but actually global.
How can money not change over a period of such sweeping changes in the world’s collective fabric? Money is needed in most dealings and foreign exchange is a way of life for a majority of traders and individuals. Governments are deeply involved and affected by foreign exchange rates. Multiple currencies are in business and foreign exchange is important. We are affected by it one way or another.
An Indian who wants to travel across the world will need to understand foreign currencies as much as an American who wants to spiritually realise himself in the Far East! Europeans travel far and wide in search of fashion while the well-heeled want to be photographed standing close to the great landmarks in the world.
Africans want to extend their markets much beyond Europe and are travelling far and wide to spread their distinctive culture. None of these global citizens can hope to carry just their native currency and survive in foreign lands! When an American comes to India, he will need to exchange dollars to rupee in order to buy things here. This is an example of foreign exchange.
Each nation has its own national currency. The exchange rates make a particular currency more valuable than another. An American in India will need to know how many rupees he can get for the value of his dollars. He will need a benchmark as well as the current exchange rate in money exchange bureaus and local banks. This will be the exchange rate of the American dollar vis-à-vis the Indian rupee.
For example, the US dollar rate in India today is approximately at 1 dollar = 56 rupee. If for some reason the exchange rate changes to become 1 dollar = 40 rupee, it will mean that the dollar has depreciated against the rupee. The depreciation and appreciation of any currency determines its strength, in comparison to another currency. A currency’s value is linked to the policies and economic conditions of that particular country.
Don’t expect your country to simply start printing more money because there is less of it floating around! That is disastrous as exemplified by Zimbabwe. In the late 1990s, despite a failing economy, the Zimbabwean dollars were printed by the government in denominations of even 100 trillion! When the currency steadily lost its value local people started using US dollars. Finally, Zimbabwe resorted to putting its own currency on hold in 2009 and adopting US dollars instead.
Governments need to take measures to back their currencies. Earlier they could do so with gold reserves. They could also stock up on a foreign currency like the US dollar, which could be converted into gold. But this system had a gaping hole as there was not sufficient gold to go around. So, now governments assess their future economic growth and currency demand to print money.