Currency — Definition Explained Simply | Examples & Role
Currency — is the money unit of a country that is used for domestic payments as well as in international economic relations.
Currency is the official unit of money established by a national monetary system and recognized as legal tender within a country. It is used for everyday transactions, savings, investments, and international trade. A currency can be national (for example, the Russian ruble or the euro in Germany) or foreign when it is used outside its home country.
According to the International Monetary Fund (IMF), currency is a “generally accepted medium of exchange, defined by a government and used as a store of value, a unit of account, and a means of payment.” In practical terms, currency means the money people and businesses use to pay for goods and services and to settle international transactions.
Convertibility of currencies
Currencies differ in their degree of convertibility. Freely convertible currencies (such as the US dollar, the euro, or the Japanese yen) can be exchanged without restrictions on global markets. Partially convertible currencies can only be exchanged under certain conditions or in specific countries. Non-convertible currencies are restricted to domestic use and cannot be freely traded internationally.
The role of currency in the global economy
In international trade and finance, currency plays a vital role: it is used in export and import payments, cross-border investments, and loans. According to the European Central Bank, more than half of all global payments are conducted in US dollars and euros. These are considered reserve currencies, widely held by central banks as part of their foreign exchange reserves.
Examples
- The national currency of Germany is the euro (EUR).
- A European tourist exchanges euros for US dollars (USD) to pay during a trip to the USA.
- In some countries, large transactions are carried out in foreign currencies, such as the US dollar.