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Globalization and Economics

Factors That Affect the Value of a Currency

If somebody were to hand you a dollar bill and ask how much is it worth, your first inclination may be to answer that it's worth one dollar - face value. This may ring true for a normal consumer, but in the grander scheme of things the US dollar will fluctuate in worth depending on the health of the economy.

If you have only a perfunctory interest in global finance, you may hear phrases like "the strength of the US dollar" or the Japanese Yen or British Sterling as compared to other currencies. One example of a strong showing for US money is it's value in Canadian dollars. Because the US dollar was worth $1.04 CDN as late in 2009, it grew in value from the prior year, when one could only get ninety-eight cents Canadian per US dollar.

When the US dollar is strong, the currency exchange will favor it when you wish to trade for Euros, Yuan, or other monies. There are many factors that can affect the value of a single currency, too. Let's use the US dollar again an example to break down the specifics.

1) Global Trade Environment - Ideally, a country will want to export more than it imports to keep up the strength of their home currency. When the reverse happens, the country's trade partners must help to balance the exchange and keep the dollar strong by buying up domestic assets.

2) Political and Social Factors - Our monetary strength is also affected by actions in our government. A President's approval rating, for one, influences how much foreign countries invest financially in the US, and tax cuts made within reason (that is, ones that don't widen our current national debt) also work to increase household spending.

3) Activity in Other Countries - Events in Europe and Asia, unrelated to the United States, may also affect our monetary value. Military conflicts, oil activity, and strengthened economics can accordingly decrease or boost the dollar overseas.

4) Consumer Behavior - The more our citizens spend on items made in China, Taiwan, and elsewhere, the more those economies benefit as a whole for global economy, to which the domestic economy is linked. Oil prices also effect how we spend. Rising gas costs may equal less travel and consequently less spent in country.

5) Industry Factors - To counter the inevitable global competition, the domestic industries will have no choice to embrace the need for the change, to break out of the so-called red sea (fierce competition due to similarity and lack of peculiarity), and to create their own blue ocean by innovation, which is part of the human evolution.

As you study global economy, you will find many more factors affect the global worth of money. To achieve a strong dollar here, it's important to work toward strengthening domestic economy. This also increases global dependence on our economy, and hopefully good relations in trade.

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