What is Currency?

Currency is the means of purchasing through trade. Today, currency generally refers to printed or minted money. Sometimes only paper bills are thought of as currency, while other times coins are included. Currency involves the exchange of goods or services for cash.

Exchange rates refer to a country's price for the trade of items. Floating currency means that a country's exchange rate is not fixed or set in place by a main bank, but fluctuates. Fixed currency, on the other hand, is set and is the opposite of floating currency. Fixed currency is also called pegged currency and it is not commonly used, although it is often associated with the Euro and the US Dollar (USD).

The term legal tender means currency that is legally permitted to be used to obtain goods or services in a particular country. Legal tender is usually the country's own unit of currency such as the USD in the United States, but sometimes a country may use the currency of another country as legal tender. For example, the United States once used silver coins from Spain and Mexico as legal tender. These pre-Revolutionary War silver dollars are also known as pieces of eight.

Before cash was used as currency, other items considered valuable were used in trade exchanges. For instance, Aztecs in the fourteenth century used cocoa beans as currency to trade for tools and clothing. Gold dust was traded for European goods in some African countries in the seventeenth century. Salt was used in many ancient civilizations, and is actually the basis for the English word salary.

Currency conversion, or foreign exchange rate, means the conversion of one country's currency units into the value of another country. Most countries convert monies from other countries into their legal tender and the exchange rates depend on the current market. For example $5.00 USD may convert to 590.256 Japanese Yen, depending on the rate of foreign exchange on that particular day.

Current exchange rates are called spot exchange rates. Exchange rates that are set for future transactions are quoted at a forward exchange trading rate. Currency is exchanged, or liquefied, daily in the extensive financial marketplace that is the global foreign exchange.

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