What causes it to fall in the price of the world currency, and what effect it has on the world currency today?
First of all we should understand that there is no such thing as world currency. However, some currencies have dominated the global currency market and they are widely accepted all around the globe by other countries to settle their liabilities. US Dollar, Euro, Pound and Yen etc. are some of the most dominating world currencies which other countries have to keep reserve of in order to pay their foreign liabilities.
Inflation is the main reason of the fall in the price of currencies. Inflation is a state in which demand for goods and services increases in comparison to supply that results in the rise of prices of goods and services and thus reduction in actual value of the currency. Rate of inflation is the comparison of current prices of goods and services with the base year prices.
Various factors are responsible for inflation. When people have more money to spend but the supply of goods and services don’t increase with the same pace, surge in prices happens. This is called demand pull inflation. This happens because of easy availability of credit, printing of more currency notes by the government to handle its fiscal deficit, surplus gained from export etc.
On the other hand if supply decreases because of some reasons than the inflation also increases. This is called cost push inflation.
Moderate inflation is not bad at all. It is the sign of economic growth. However, too much inflation is very dangerous. It decreases the actual value of money. Hence, people have to spend more to buy the same amount of things. It is like a hidden tax which negatively affects people’s earning. The state of hyper inflation is extremely dangerous. Recently in Venezuela hyper inflation condition caused severe damage to the Venezuelan economy. People there are forced to leave their country as it has become almost impossible to survive there. So, hyper inflation can damage an economy completely.
Fall in the price of a particular currency in comparison to other currency is the result of the rising demand of the second currency compared to the first one. Suppose Indian companies and other institutions demand for USD and sell INR in a large amount, then the value of INR will decreases against the value of USD and vice-versa. This is the simple case of demand and supply. Speculation can also do the same thing.
So, we can see that there are so many reasons of falling of prices of currencies. Internal as well as external factors decide the price of a currency and its actual value.
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