A currency is the particular type of money that exists in a country and is used to carry out business transactions. Most countries utilize a currency that is unique to them (e.g. the naira in Nigeria, the koruna in the Czech Republic, the renminbi in China, etc.) whereas others have adopted a common currency to alleviate commercial activities (for example, 16 of the 27 member countries of the European Union use the Euro as their currency unit).
Typically a nation's currency is produced and controlled by the local central bank or the Ministry of Finance. In most countries, these institutions have a relative autonomy from the government and can act on their own within certain limits.
For trade purposes, a country’s currency can be transformed into another currency at a predefined ratio called rate of exchange. What this ratio is for a particular geographical zone is determined by the respective central bank. Depending on its exchange rate regime, a currency can be fixed or floating. Fixed currency is one whose value is matched to the value of another single currency or to a precious commodity, such as gold or silver. The value of a fixed currency will vary in accordance with the value of the currency it is fixed to. Under the Bretton Woods System, most currencies were fixed to the value of the US dollar. The US currency, on its turn, was fixed to the value of gold. When governments aim to keep currencies at specified levels, they enter the currency markets. The monetary authorities will buy and sell while monitoring supply and demand.
The second type of currency, floating currency, does not depend for its value on another currency. Rather, the worth of a floating currency is determined by its performance on the foreign exchange market. National currencies weaken or strengthen depending on the volume of hard currency reserves and gold, their international trade balances, level of inflation, and the overall stability of the economy. Most of the currencies used around the world are floating. The Canadian dollar is regarded as a model floating currency because since 1998, the Canadian Central Bank has stopped interfering with its price.
Based on how profitable it is to trade in a particular currency on the market, the world’s top 3 currencies are: the US dollar, which is involved in 90 percent of all transactions worldwide and is the world’s foremost reserve currency; the Euro, the official currency of the second largest economy in the world (used in the Eurozone), which accounts for 37 percent of the daily transactions in the foreign exchange market; and the Japanese yen, which is involved in a fifth of all forex transactions and is boosted by Japan’s thriving commerce.
Other valuable currencies, which are worth investing in, are the British pound (a.k.a. pound sterling), and the Swiss franc. Together, these two are involved in 10 percent of the deals on the foreign exchange market.
A common trait of the first four of the above currencies is that they are all fiat currencies. This means that they have no intrinsic value, i.e. they are not based on any physical commodity, but their worth depends on people's faith in them. If people lose faith in a fiat currency, it will stop holding any value and will become no more precious than the paper it was printed on.
The fifth currency, the Swiss franc, is part of the country’s gold standard system. Under this system, the currency is fixed to gold and depends for its worth and rate of exchange on that precious metal.Algerian dinar