Freely convertible currency

Conversion is the transformation of something into something else or the realization of an equivalent exchange. In particular, conversion (or conversion) of currencies means the transfer of a monetary amount from one currency to another. It can be said that conversion is a kind of combination of restrictions and freedoms for those involved in foreign exchange transactions, when they exchange the money symbols of one country for the corresponding signs of other countries.

In order for the country to be included in the world economy and have the opportunity to develop its foreign economic activity, it must have a convertible national currency.

Currency conversion has a positive impact on the investment climate in the country. Enterprises in need of capital have the opportunity to raise funds from abroad. On the other hand, foreign investors are free to transfer money earned in the country abroad and reinvest profits.

Currencies are subdivided by the degree of convertibility into the following types:

• Freely convertible,

• Limited (partially) convertible,

• Closed (non-convertible),

• Clearing settlements.

Freely convertible currency (SLE) is a currency that is freely and without restrictions exchanged for the currency of other states and countries. As a rule, it has a complete internal and external reversibility, that is, the same exchange regime.

The area of use of the exchange of freely convertible currencies includes current transactions that are related to daily foreign economic activity such as foreign trade, non-trade payments, foreign tourism, as well as operations relating to foreign investments or foreign loans.

The rate of freely convertible currency is established only as a result of open trades, which are held on the currency exchange. Thus, the state is not able to artificially limit the value of the national currency or use currency corridors.

The only option available to the state for intervention is the currency intervention that the National Bank of the country can implement. However, only market methods should be used, that is, reducing the value of the currency by increasing its supply on the exchange.

In today's world, a freely convertible currency exists only in a limited number of countries: the United States, Britain, Japan, etc. (A total of only 17 countries). At the moment, JMC makes up about 15% of all existing currencies.

The national bank of any country needs to create currency reserves in order to make international payments. For this role is most suitable freely convertible currency. Some of them are called reserve currencies.

For the implementation of foreign trade and financial transactions, only US dollars, euros, Japanese yens, British pounds and Swiss francs are used, and it is in these currencies that almost 100% of the world's foreign exchange reserves are stored.

Freely convertible currency, in turn, is an indicator of the economic stability of the state or country. As a result of free exchange of currencies all foreign economic activity of the state is greatly simplified.

There are currencies that can participate in financial transactions at the international level, but they are not exchanged in other countries for any monetary units. They are called partially or limitedly convertible.

Forex trading is also carried out exclusively in freely convertible currencies. They have the greatest liquidity, and this makes it possible to quickly exchange one for another.