Each of us makes different payments almost all day. We buy products at the store, at the local marketplace or we regulate our bills. We usually do this automatically by paying a certain amount for the goods or services chosen. For this purpose, we usage the currency in force in the country where we are staying. However, we seldom wonder where its value comes from and why its exchange rate against the currencies of another countries is constantly changing. In this article, we will look at the basic types of currencies and the mechanisms that form their valuation. This will make it easier for you to realize why sometimes for 1 US dollar we pay PLN 3.60, and in another period even nearly PLN 5.
What's a currency?
At first let's get to know the definition. Currency is the authoritative means of payment in force and in common circulation in the country or area concerned. It is legally recognised by the authorities, regulated by the central bank there and utilized to value goods, services and taxation settlements.
Each currency has its global three-letter code according to ISO 4217, where the first 2 letters denote the country and the 3rd currency name. The most celebrated derogation from this regulation (not the only one) is EUR. Since the euro is not the currency of 1 country, its name has been derived from the first 3 letters of the currency name ‘euro’.
Currency types
Any currency, in addition to being an authoritative means of payment in its country or currency area, may belong to 1 or more groups distinguished by its function in the global financial system. specified classification is crucial due to the fact that it affects the level of request for the currency afraid and consequently besides the exchange rate.
Reserve currency
The reserve currency is simply a abroad currency which the central bank of a given country holds in large quantities within its reserves. In another words, alternatively of keeping all the country's savings in the home currency, central banks buy unchangeable and widely accepted currencies of another countries to safeguard their country's financial stability.
What am I talking about?
Let us presume that investors and citizens lose assurance in the currency of the country due to war or disastrous decisions of the government. There is simply a mass sale of assets, and the proceeds are transferred to a unchangeable dollar or euro. So it comes to a situation where abruptly there is simply quite a few home money in the marketplace due to the fact that everyone wants to get free of it. This drastically lowers its rate against another currencies and leads to immediate ]]>inflation growth]]>.
To prevent this, the central bank enters the marketplace and does something unlike panicking people – it starts selling its reserves in dollar/euro, and alternatively buys the local currency. As a result, it reduces the amount of home money in the marketplace and maintains its value vis-à-vis another countries' payment appropriations.
The most popular reserve currency in the planet is the US dollar (USD) and the euro (EUR) and their share in the reserves of countries in 2025 is presented in the following graphic.
At this point, attention should be paid to 1 very crucial fact.
De Dollarisation
By definition, de-dollarisation is simply a process of reducing the share of the US dollar as the dominant currency in central bank reserves, global trade and clearing systems. Despite the fact that the position of the dollar in this respect is not at hazard present (there is no second equally liquid and recognisable currency), it is worth noting that this trend is slow progressing.
In 2000, the US dollar accounted for 70% of global abroad exchange reserves. Today, as you already know from the above graphics, it is about 56%.
There is no single origin of this phenomenon. The following shall be distinguished:
1. A decrease in the dollar’s importance in favour of ‘non-typical’ currencies.
According to the IMF (International Monetary Fund), 75% of the full changeover of abroad reserves took place from a dollar to less-captured currencies specified as the Australian dollar (AUD), Canadian dollar (CAD), Chinese yuan (CNY) or Korean won (CRW). This is very well illustrated by the graphics below. The left illustration shows how since 2000, the decrease in the share of the dollar in the global currency reserves (red line) coincided with the increase in the share of the euro (blue line), after which the share of the euro fell and the share of currencies designated as non-traditional (granate line) grew. On the right graphics, we see what currencies were liable for this increase.
The IMF as the main causes of this phenomenon indicates higher return rates (higher interest rates in these countries), predictable and unchangeable macroeconomic policies and the improvement of financial technologies that reduced transaction costs and facilitated smooth trade and management of these assets.
2. A gold renaissance as a safe haven.
Today, central banks are more and more eager to keep their ]]>gold reserves]]>. This trend peculiarly intensified after the Russian invasion of Ukraine of 2022, resulting in the West freezing about $300 billion of Russian assets located in their institutions. Since then, central banks in peculiar of emerging markets (Global South) have been deliberately diversifying from the US dollar, buying more than twice as much gold on average all year as before this conflict. Let me just remind you that gold has this advantage over dollar, that it can be physically stored in its own vaults, which eliminates the hazard of political sanctions.
Continue reading: ]]>How to analyse currencies? Learn about the factors that govern courses]]>
]]>What is the price/book value index (P/BV)? What are his disadvantages and advantages?]]>
Author: ]]>Krzysztof Miazga]]>
