National Currency
A national currency is a legal tender issued by a country's central bank or monetary authority. Examples of countries that make use of another country's currency are parts of Latin America, regions like Ecuador and El Salvador, which recognize and accept the U.S. dollar for the exchange of goods and services. Examples of countries that make use of another country's currency are parts of Latin America, regions like Ecuador and El Salvador, which recognize and accept the U.S. dollar for the exchange of goods and services. A national currency, such as the U.S. dollar, the Euro, and the Japanese Yen (JPY), is recognized as the world's most widely accepted type of currency. A national currency is a currency issued by a government's central bank or monetary authority.
What Is a National Currency?
A national currency is a legal tender issued by a country's central bank or monetary authority. It is typically the predominant medium of exchange for purchasing goods and services. In the United States, the dollar is the primary form of currency, backed by the full faith and credit of the government and the Federal Reserve.
Large currency bases like the dollar, and even the British pound (GBP), can also play an instrumental role in other regions of the world. For example, commodity prices are quoted in U.S. dollars (USD) despite trading in countries outside of the United States. What's more, some countries might peg their national currency to the U.S. dollar to keep inflation aligned with expectations and maintain a stable monetary policy regime.
How a National Currency Works
A national currency, such as the U.S. dollar, the Euro, and the Japanese Yen (JPY), is recognized as the world's most widely accepted type of currency. They have a global status as a reliable reserve currency with minimal risk of collapsing. As a result, most foreign transactions are conducted in one of the three currencies. Some countries have also adopted other nation's currency as their own. Examples of countries that make use of another country's currency are parts of Latin America, regions like Ecuador and El Salvador, which recognize and accept the U.S. dollar for the exchange of goods and services. On the other hand, some countries like the United Arab Emirates simply peg or fix their currency rates to the U.S. dollar. That way any geopolitical or economic event won't destabilize the national currency overnight.
Trading National Currencies
Furthermore, currency trading is often performed in pairs, meaning you trade one currency in relation to another. That said, greater adoption and creation of exchange-traded funds (ETF) has made it possible to trade individual currencies. For example, Invesco offers a line of exchange-traded products that offer exposure to a national currency like the Australian Dollar or British Pound.
Related terms:
Currency Substitution
Currency substitution is when a country uses a foreign currency in lieu of, or in addition to, its currency, mainly due to the former's stability. read more
Exchange Rate Mechanism (ERM)
An exchange rate mechanism (ERM) is a set of procedures used to manage a country's currency exchange rate relative to other currencies. read more
GBP
GBP is the abbreviation for the British pound sterling, the official currency of the United Kingdom and its territories. read more
JPY (Japanese Yen)
JPY is the currency abbreviation or the currency symbol for the Japanese yen (JPY), the currency for Japan. read more
Key Currency
A key currency is a currency with a relatively stable value that is used as a benchmark for international contracts, trade, and foreign exchange. read more
Managed Currency
A managed currency is one whose value and exchange rate are affected by the intervention of a central bank. read more
Sudanese Pound (SDG)
The Sudanese pound (SDG) is the national currency of the Republic of Sudan. read more
USD (United States Dollar)
USD is the currency abbreviation for the United States dollar, the official currency of the United States of America. read more