Freely convertible currency — Definition Explained Simply | Examples & Role
Freely convertible currency (FCC) is a national currency that can be exchanged without restrictions for any other foreign currency for any type of transaction anywhere in the world.
Freely convertible currency (FCC) is a currency that can be exchanged without restrictions for other countries’ currencies in current and capital transactions. It is accepted in international settlements for trade deals, investments, loans, and is also used as a means of saving and accumulation.
The existence of a freely convertible currency is a sign of a country’s economic stability and trust in its financial system. That is why many countries strive for their national currency to have FCC status. According to the International Monetary Fund (IMF), such currencies include the US dollar (USD), the euro (EUR), the British pound sterling (GBP), the Japanese yen (JPY), and a few others.
Characteristics of freely convertible currencies
- No restrictions on exchange either inside the country or abroad.
- Accepted in all international settlements.
- Highly liquid on the global market.
- Often serve as reserve currencies for central banks.
Types of currencies by convertibility
- Freely convertible currency (FCC) — exchanged without restrictions and used in international settlements (USD, EUR, GBP, etc.).
- Partially convertible currency — can be exchanged only for specific operations or under certain conditions. For example, the Chinese yuan (CNY) had restrictions on capital flows for a long time.
- Non-convertible currency — used exclusively within the country and not freely exchanged on the world market. Example: North Korean won (KPW).
FCC and the global economy
Freely convertible currencies form the foundation of the global financial system. Most international trade transactions are carried out in US dollars and euros. The central banks of most countries hold reserves in these currencies, as they are considered the most reliable and stable.
Examples
- US dollar (USD).
- Euro (EUR).
- Pound sterling (GBP).
- Japanese yen (JPY).
- Swiss franc (CHF).