valTrader Tip: The Value of Fiat Money As we trade day-to-day have you every wondered what really makes the value of fiat money? This is not to be confused with values of cross currencies valuations (i.e. EUR vs the Dollar), as this is a bit of a different issue. That being said, at the base of these cross currency prices, the value or the percieved value of the indivudal currecy is at the base of the prices seen in FX.

Most money today in our global monetary systems are considered fiat currencies. This basically means it has an intrinsic value of zero, though it has a value of what people think it is. In short fiat currencies are: State-issued money which is neither convertible by law to any other thing (unlike a gold/commodity base standards). Now I know that many economists have put together very complex models on valuations of fiat currencies. As FX traders most can not get into this detail in our daily trading. So what we will attempt to do here is to break it down into its simplest formula. The following is this formula:

GDP (Gross Domestic Product)/Monetary Base
GDP can be broken down into many subcategories and adjustments (the devil is often in the detail). The IMF has said that GDP: measures the monetary value of final goods and services produced. One could get into a discussion on just what GDP is, but as market players what is important is what data is fed to the markets, as this is what markets will move on – at least in the short run. Many other indicators can be used to see where GDP is going. Such as: political stability, central bank monetary policy, money velocity, innovation, retail sales, inventories, population demographics, productivity, PMIs, … the list is long.

Since 95% of fiat currency comes into existence via credit, anything that adjusts the amount of credit will affect the monetary base. Interest rates, credit formation, inflation, employment, are just some indicators that directly or indirectly affect the monetary base via central bank policy.

But again, for the average trader this simplified formula can go a long way to start to understand valuations of fiat currencies. Learn more on this, review of the news headlines, technical analysis and more on your daily YouTube Blue Point Trading Morning Call. Click here, or watch below this Trader Tip in video format.

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Trader Tip: The Value of Fiat Money

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