Currency valuation establishes the foreign currency exchange rate.
Keeping world trade going is imperative. It is important that we have a process whereby the value of the currency issued by a given country can be compared to that of another country. This process of determining the currency exchange rate is known as currency valuation.
In previous years, the currency valuation process tended to be based on criteria such as the amount of gold bullion in a country’s treasury. Simply put, the more gold available, the more secure the currency was considered. It would be worth more when exchanged for currency issued by a country that had smaller gold reserves. This criterion, often referred to as the gold standard, has not been the norm for nearly a century. Today, there are several other factors that influence the currency appreciation process.
Today, this process will involve evaluating the current rate at which goods and services are exported to other countries, as well as taking into account the rate at which goods and services are received from other countries. The trade flow has a direct impact on the appreciation of the currency between two countries. In addition to using a current snapshot of import and export rates for goods and services, there is also an indicator of how a particular country’s currency is bought. Many entities will buy a country’s currency at its current exchange rate, with the expectation that its value will increase relative to other currencies. This expectation, if focused on a given country’s currency, will become a self-fulfilling prophecy, at least in the short term, as demand drives the appreciation of a given country’s currency.
Of course, other factors also come into play. In particular, natural disasters can have a great impact on the currency appreciation process. A country that can no longer export essential goods and services and needs to rely on imports for a while to rebuild the national economy after natural devastation will see the country’s currency lose value significantly, at least in the short term. As the internal conditions of the country improve and the balance between imports and exports becomes equitable, the appreciation of the currency will begin to increase again.