What is Currency Valuation?

Keeping global trade going is imperative. It is important that we have a process whereby the value of currency issued by any given country can be compared to that of another country. This process of determining the currency exchange rate is referred to as currency valuation.

In years past, the process of currency valuation tended to rest upon criteria such as the amount of gold bullion that is held by the treasury of a given country. Simply put, the more gold on hand, the more secure the currency was considered to be. It would be worth more when exchanged for currency issued by as country that possessed smaller reserves of gold. This criterion, often referred to as the gold standard, has not been the norm for almost a century now. Today, there are a number of other factors that influence the process of currency valuation.

Today, this process will involve evaluating the current rate that goods and services are exported to other countries, as well as taking into consideration the rate that goods and services are received from other countries. Flow of commerce has a direct impact on the valuation of currency between any two countries. Along with using a current snapshot of the import and export rates of goods and services, there is also the indicator of how the currency of a given country is being purchased. Many entities will purchase the currency of a country at its current rate of exchange, with the expectation that it will increase in value against other currencies. This expectation, if focused on the currency of one particular country, will become a self fulfilling prophecy, at least in the short term as demand drives the currency valuation for a given country upward.

Of course, other factors also come into play. Most notably, natural disasters can have a large impact on the currency valuation process. A country that is no longer able to export key goods and services and must for a time rely on imports to reconstruct the internal economy after a natural devastation will see the currency of the country decrease significantly in value, at least for the short term. As conditions within the country improve and the balance between imports and exports becomes of equitable, the currency valuation will once again begin to rise.