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Currencies are money, right?

What is currency

How it's made?

It would have been so simple, if the currencies were tomatoes. But unfortunately money are not tomatoes, not a product, neither commodity. This is what makes them more complex and so unique. We can’t grow our own currency just like we grow tomatoes and we do not have any control over our or any national currency. It is an exception, if you are the central bank or the head of a central bank.
The currency that we use belong to the national bank that creates them and that is why we must look at it like a service.

Money is a service

Central Banks creates money, distribute them to the economy, once money reach us we use then just like a service, service that makes exchange of goods and other services easier and faster process. Money are created thru debt (credit) and the interest rate is what pay the service fee.

How users pay the price

Central Bank Interest Rates These are the rates at which central banks lend money to commercial banks, the price for the service called money. Everyone pay the price for the service called money. The government is using collected taxes to pay back the credit + interest. When the factories (CB) produce currencies they create inflation wich is then amplified by the mechanism called "Reserved Banking". So the money that we own lose value in a rate equal to the inflation level.

Holding cash is expensive

Some banks apply negative interest rates policies. Why?
Appying fee to cash deposits for Banks and financial institutions is a motive to move the cash out. Banks then are offering them as low-interest loans, mortgages etc...
increasing people spending and boosting the economy. This policies increase the supply of money and the amount of inflation.

Quantitative easing (QE)
QE is the newest way to manufacture and distribute money to the economy. It was first introduced by the FED on November 25, 2008 as tool to fight the financial crisis. Here is the funny snippet that pops-out of a google search.

Quantitative easing - goole search snippet

The last two words are interesting. "Inflation to target"
This points out that central banks have to keep the inflation on a predefined levels
the so called monetary policy goals.

Learn much more about money and bank policies watch an educational video on how the economic machine works

What forces the prices to move?

This is common knowledge, everyone know that supply and demand is what move the prices. The same rule apply to the foreign currency markets.

Who provide the supply?

Central Banks issues currency so they are the manufacturers of money. Commercial Banks can increase the money supply thru "fractional-reserve banking" mechanism allowing fresh money creation in the form of credit.

What create the demand?

The demand is created by all market participants. Forex market participants are Governments and Central Banks, Commercial and Investment Banks, Forex-Brokers, Investors and Speculators, Businesses, Consumers and Travelers.

What forces currency market participants to exchange currencies?

It's a desire or a need.
- To use a service or own a product that is manufactured and tradable in a foreign currency.
- To make profits thru speculation
- To travel to foreign country

How Central Banks Control the Production and Supply of Money

How central banks control money supply

Source: TheBalance


Because money are produced thru credit, the interest rates are used to control the value and supply. In the snippet they call it discount rate.
Going a little more in to details, there are two major types of i-rates that determines currency value. The discount rate and the Federal Founds Rate .

This terminology is specifically used by the FED in USA, but most of the CBs around the world implement the same techniques. Second most used cash flow controller are the direct market operations. With other words, buying government bonds, equities and whatever needed to increase the liquidity and economic activity.

More than 90 % of currency deals are speculative trades

The Currency power, few other perspectives
As been said, currency is a service. Owning or using it isn't free. So, for sovereign country it is a matter of national interest to force national business that operate globally to be paid in national currency.
The U.S. - Saudi Policy, that creates the phenomenon petrodollar is the best example of that.
Forcing the trade of the most needed commodity to be only in US dollars ensure the demand for the US money, it is just a matter of supply to control the price.


“It is far more common for people to allow ego to stand in the way of learning.” -Ray Dalio