Your Money Matters

Currency, Money and exchanges

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By Trevor Keidan

PHNOM PENH - "A rich man is nothing but a poor man with money"- so said the famous American actor and comedian WC Fields.

And although he might have been right, the fact of the matter is that most of us need money to be able to live and to do the things we want to.

But how many of us actually know how money really works and where it comes from?

How many of us know how the value of money and currencies are calculated?

The reality is that most of us never give money a second thought - we just take it for granted as we go about our daily business.

According to the Merriam-Webster online dictionary, money is defined as "something generally accepted as a medium of exchange, a measure of value, or a means of payment".

For most of us money (or currency) is a unit of purchasing power that we normally put in our pockets or deposit in our bank accounts.

We think of money and currency in terms of coins and paper bills that we use to pay for goods and services. It can also be a number on the statement from our bank.

When it comes to paper money, it was actually the Chinese who invented the concept in their use of skins, bark and parchment with imperial seals as currency.

It was then popularised and put in to serious use in Europe by the French in the 1700s.

They issued paper money backed by gold or silver.

The idea to back the money with an amount of gold came from French blacksmiths who began the practice of giving people a receipt for their gold.

The bills could be exchanged for the relevant amount of gold at a later date.

This practice of "backing" paper money by the equivalent amount in gold became known as the gold standard. It remained the standard until 1971, when the Americans discontinued the backing of the United States dollar by an amount in gold.

All other currencies followed the United States and left the gold standard.

Market forces

So, today what does guarantee the value of our riel, US dollar or euro? The short answer is ... nothing at all.

The value of our riel, US dollar or euro is decided by market forces. This system determines the value of the money that we have in our pockets and bank accounts, as well as its value in relation to other countries' currencies.

The reality is that most of us never give money a second

thought.

When it comes to currency exchanges, there are two systems in play - the floating currency and the pegged currency. In general it is the more immature economies that will be pegged - usually to the dollar.

The more mature market economies will use the floating exchange rate system.

The idea behind the floating exchange rate system is that it is put to use in stable economies.

The disadvantage is that if there is instability, there will be wild swings in the economy.

And as we are all aware, there is a lot of instability in countries across the world right now with the global financial crisis.

Investors have been reacting to this worldwide instability by buying up the US dollar and Japanese yen.

They have also been dumping - or selling off - the euro and the British pound because of fears that Europe and Britain are more exposed to the financial crisis.

As a result, the dollar is at two-and-a-half-year highs against the euro and six-year highs against the pound.  The yen, on the other hand, is at a 13-year high against the dollar, despite the dollar's strength! So, what's next we might ask?

There is some speculation that the dollar could continue to rise over the coming months, but its rise could also be affected by efforts to settle the United States' huge budget deficit.

As for the yen, there is concern over its excessive volatility and speculation that the Japanese government might have to step in to halt the surge.

No matter what happens to the dollar and the yen, it appears that currencies worldwide will not escape the financial crisis unscathed. Countries' currencies are worth keeping an eye on - they are good indicators for how particular country's economy and companies are doing.

Remember ... Your Money Matters!

Trevor Keidan is managing director of Infinity Financial Solutions, a firm providing impartial,  tailor-made  personal financial advice to clients in Cambodia and Southeast Asia. Should you wish to contact Trevor, please send an email to [email protected].