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National Currency

Updated on January 30, 2024
Article byHimani Bhatt
Reviewed byDheeraj Vaidya, CFA, FRM

What is National Currency?

A national currency (NC) is any form of money used by the people of a nation as a medium of exchange to engage in economic transactions. It is a legal tender issued and regulated by a country’s central bank or monetary authority. US Dollars (US$), Pounds Sterling (£), Euros (€), Japanese Yen (¥) and Indian Rupee (₹) are examples of national currencies.

National Currency

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Banknotes and coins are the most common present-day types of currency. The US dollar (USD) is the currency of the United States, circulated by the US Federal Reserve. While most nations possess their own currency based on their respective national currency act, some have embraced other country’s currency like Ecuador, Zimbabwe, and Panama. A few others, like members of the European Union, have adopted a common official currency, Euro.

Key Takeaways

  • The national currency is a government-issued legal tender used to buy or sell goods and services within an economy.
  • The national currency of the United States is the US dollar (USD), also considered the strongest global currency.
  • Inflation and interest rates impact the value of a national currency.
  • Examples of national currencies are US Dollars, European Euro, British Pound Sterling, Japanese Yen, and Chinese Renminbi.

National Currency Explained

National currency includes paper money and coins legally in circulation in a country. It is an integral part of a country’s identity and ensures its economic stability. Besides being a unit of exchange, it is also a sign of value and wealthWealthWealth refers to the overall value of assets, including tangible, intangible, and financial, accumulated by an individual, business, organization, or nation.read more.

The currency of a country and its financial wealth goes hand-in-hand. A strong or weak currency demonstrates a powerful or incompetent economic system, respectively. Likewise, a country’s monetary policyMonetary PolicyMonetary policy refers to the steps taken by a country’s central bank to control the money supply for economic stability. For example, policymakers manipulate money circulation for increasing employment, GDP, price stability by using tools such as interest rates, reserves, bonds, etc.read more influences its currency. 

Possessing a currency helps the government to pursue national economic objectives. By controlling its supply and valuation, the government can rein in inflation and prevent unemployment. For instance, a country going through a financial crisisFinancial CrisisThe term "financial crisis" refers to a situation in which the market's key financial assets experience a sharp decline in market value over a relatively short period of time, or when leading businesses are unable to pay their enormous debt, or when financing institutions face a liquidity crunch and are unable to return money to depositors, all of which cause panic in the capital markets and among investors.read more can devalue its own currencyDevalue Its Own CurrencyCurrency devaluation is deliberately done in order to adjust the established exchange rates by the government and it is mostly done in the cases of fixed currencies. This mechanism is used by economies with a semi-fixed or fixed exchange rate, and it should not be confused with depreciation.read more to make its goods and service more attractive to foreign buyers. 

The two major fiscal elements that affect the value of any currency on the currency list are inflation ratesInflation RatesThe rate of inflation formula helps understand how much the price of goods and services in an economy has increased in a year. It is calculated by dividing the difference between two Consumer Price Indexes(CPI) by previous CPI and multiplying it by 100.read more and interest rates. Note that both components are interconnected with each other.  For example, low interest rates leave more money in the hands of people. This increases the demand for goods and services and contributes to economic growthEconomic GrowthEconomic growth refers to an increase in the aggregated production and market value of economic commodities and services in an economy over a specific period.read more. However, it may increase inflation.

To reduce inflation, central banks increase interest rates. With lesser money in hand, the demand for goods and services reduces, thus lowering their prices. In addition, high-interest rates attract foreign capital to a country, thereby increasing the demand for its currency.

Thus, a country with high-interest rates relishes increased profitability and a stronger currency than those with lower interest rates. Moreover, a country with a high inflation rate attracts investors seeking avenues to amplify returns. As a result, more investment makes the currency stronger.  

However, excessive inflation may adversely impact the country’s financial soundness and, consequently, the utility of its currency. Thus, it is essential to sustain a bearable inflation rate that supports growth.

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Trading

It is a well-established fact that nations trade with one another. One currency has to be converted into another to execute transactions between them. Since currency has a value, it can be bought and sold as a commodity in the exchange market. Foreign exchange marketForeign Exchange MarketThe foreign exchange market is the world’s largest financial market that decides the exchange rate of currencies.read more facilities this conversion.

Forex market is a dispersed global commercial setting to manage the transactions of currencies at its prearranged exchange rates. It permits round-the-clock trading in pairs. Nevertheless, a currency trades proactively only throughout the country-specific usual market hours. The printing of these currencies however, is based on the national currency act of each country.

This helps discover the value of a nation’s currency vis-à-vis the currency of another country. A strong currency is beneficial for exporters (sellers), while the importers (buyers) gain from a weak currency. 

The currency of countries like the US (USD), UK (Pound sterling), China (Renminbi), and Japan (Yen) maintain a strong value. This is because central banks worldwide hoard them in abundance to expedite international tradeInternational TradeInternational Trade refers to the trading or exchange of goods and or services across international borders. read more. Such currencies are called reserve currencies.

Their predominance in the global market makes the other countries tabs on the former’s monetary policies. Any change in inflation, stagflationStagflationStagflation is an economic scenario where stagnation coincides with inflation.read more, or interest rates influences the value of all currencies. Currently, the USD is designated as a global reserve currency. 

A currency is not an exclusive type of legal tender. However, it is the most basic exchange unit for commercial goods and services. 

Symbol

Despite most countries having an official currency based on their individual national currency acts, a few countries adopt other currencies to fit their requirements.

It is also a common factor of contemplation why these countries also have a symbol denoting their currency. For instance, the US Dollar is denoted by $, Indian Rupee is denoted by ₹, and Sterling Pounds are denoted by £.

These graphical representations of currencies is for easy identification and avoiding confusion while listing on foreign exchange. Moreover, each currency also has an assigned code and a currency code symbol that is used on currency exchange markets.

Examples

Let us understand the currencies of the world on the national currency list to see the default denominations of the governments of the world. This shall also give us insights into the strength of a few currencies above others. . 

National currency Country Symbol
US Dollar (USD) The US $
Bonaire
Republic of Zimbabwe
US Virgin Islands
East Timor
Ecuador
El Salvador
Marshall Islands
Micronesia
Palau
Guam
Somalia
Sint Eustatius
Turks & Caicos Islands
European Euro (EUR) Austria
Cyprus
Belgium
Estonia
France
Finland
Germany
Ireland
Greece
Italy
Lithuania
Latvia
Malta
Luxembourg
The Netherlands
Portugal
Spain
Slovakia
Slovenia
Japanese Yen (JPY) Japan ¥ or 円
Sterling Pound (GBP) The United Kingdom £
South Georgia and the South Sandwich Islands
Swiss Franc (CHF) Switzerland Fr.
Liechtenstein
Canadian Dollar (CAD) Canada $
Jordanian Dinar (JOD) Jordan د.أ
Palestine
Chinese Renminbi/Yuan (CNY) China ¥ or 元
Armenian Dram Armenia ֏  
Republic of Artsakh
Indian Rupee India
Bhutan
Singapore Dollar Singapore $
Brunei
Eastern Caribbean Dollar (XCD) Dominica $
Saint Kitts & Nevis
Anguilla
Saint Lucia
Saint Vincent & the Grenadines
Antigua & Barbuda
Grenada
Montserrat
Australian Dollar (AUD) Australia $
Kiribati
Nauru
Tuvalu
South African Rand (ZAR) South Africa R
Eswatini
Lesotho
Namibia

As per the latest Wall Street Journal report, El Salvador plans to designate Bitcoin as its national currency. It made the cryptocurrencyCryptocurrencyCryptocurrency refers to a technology that acts as a medium for facilitating the conduct of different financial transactions which are safe and secure. It is one of the tradable digital forms of money, allowing the person to send or receive the money from the other party without any help of the third party service.read more a legal tender in September 2021. The country is preparing to raise $1 billion through the first-ever bitcoin-backed sovereign bond. 

It is the first nation to have Bitcoin as a national currency. President Nayib Bukele has turned El Salvador into a real-life lab for cryptocurrency, making it the Singapore of Latin America. However, the International Monetary Fund (IMF) is unsure about the efficacy of this move as most country citizens still trade in USD.

Also, a recent survey conducted after this revolutionary move disclosed the dissent of 70% of respondents. Therefore, they consider this as an unreliable move. 

Exchange

The foreign exchange market is considered to be the most liquid market in the world and given that fact that it operates 24/7, the trading activity is on most of the times. Moreover, buying and selling on this market usually happens with marginal differences and therefore, the risk factor is minimal in comparison to other markets.

The major reasons why people exchange currencies from the national currency list include travelling to a foreign country, sponsoring education abroad, business payments and receipts, and brokers who exchange currencies on behalf of others.

Frequently Ask Questions (FAQs)

Q#1 – What is the importance of a strong national currency?

A – A strong national currency facilitates seamless international trading affairs without facing major outstanding debt. Also, a country with a strong currency enjoys domestic financial security, thereby experiencing low inflation.

Q#2 – How does the Forex market help trade in national currencies?

A – Foreign exchange (Forex) marketplace regulates the trading of national currencies at agreed-upon exchange rates. It compares the value of one currency to another by 24×7 trading in pairs. While exporters benefit from a strong national currency, the importers benefit from a weaker currency.

Q#3 – Name the nine strongest national currencies.

A – The nine strongest national currencies are:

1. US dollars
2. European Euro
3. Chinese Renminbi
4. Japanese Yen
5. British pound 
6. Australian Dollars
7. Canadian Dollars
8. Swiss Franc
9. South African Rand

Q#4 – Can Bitcoin be considered a national currency?

A – Given its increasing market prevalence, it can be regarded as a national currency. Recently, El Salvador has even announced it as its national currency. However, its relevance in the Forex marketplace is yet to be seen as the IMF, and most countries are regarded as unreliable units.

This has been a guide to what is National Currency. Here we explain the its symbols, exchange, examples, and trading in detail. You may learn more about accounting from the following articles –

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