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What is Fiat Currency? Will Digital Currency Take Over?

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What is Fiat Currency? Will Digital Currency Take Over?

What is Fiat Currency? Will Digital Currency Take Over? Fiat currency is basically money which a government declare as legal tender. Fiat money doesn't have to be backed by a physical commodity.

Foreign exchange rates basically refer to the measure of the transfer value between one country’s legal currencies to that of any other country at any given time. As most of the countries around the world accept only single mode of currency, one has to exchange currency in order to make purchases or to enter into any kind of business in some other country. You must keep in mind that foreign exchange rates are not static, but fluctuate on a daily basis, like the stock market. So, money value can increase or decrease depends on the country you are currently trading with.

To be more precise, it can be said that foreign exchange rate is the amount of money one needs to spend. The foreign exchange rate is the amount of money or one currency you need to spend in order to purchase another currency. The process is called currency conversion.

Now, what determines the foreign exchange rate? The rates are usually dependent upon the activity in the foreign exchange market. And this market exists for the availability of fiat currency. Fiat currency has value because the government who issues it says it does. However, there are also cases in which exchange rate is set by the government where the currency is deterred from floating in the open market. China is a precise example of the above scenario where the government is in control of the exchange rates.

But in reality, foreign exchange rates or the value of a country’s currency is never solely fixed on what the government says it to be. It is actually a mix of what rates the government quotes and what are the fiscal policies of that country. Foreign exchange rates are also dependent on the condition of that country’s economy and also what people think and opine on what the value of the currency should be. This leads to the need of currency trading like a commodity, and hence the existence of foreign exchanges market and consumers setting up regular payments by standing order to pay for mortgage payments overseas.

For example, if a country has a weak economy, is running into fiscal deficits, and is replete with financial scandals, it will have a negative impact when determining the foreign exchange rate. This might also lead to a scenario where in might lead to dumping of the currency which is not desired, and a rush to buy other forms of money. A similar situation occurred when US dollar went on a spiralling downward against the Euro, Yen, and, Pound in the year 2007and 2008.

So, there are no single but many factors that determine foreign exchange rates and these determine what rate of exchange you will get when setting up a standing order to make regular payments overseas.