Obviously, there is a lot that can be said about currencies. We’ll just cover some of the basic concepts of currencies as they exist in the modern marketplace: A currency is the standard unit for transactions in a country.
The United States use US Dollars, Japan uses Yen, Germany uses Marks, etc. If you travel to another country, you will need to change your currency into the local country’s currency to be able to pay for things; however, you will not get one US Dollar for one Japanese Yen. There is an exchange rate involved. One U.S. Dollar may cost 80 Japanese Yen. This may seem like a strange number until you notice that something that costs about $2 in the United States will cost about ¥160 in Japan. So who determines what the exchange rate is? In many ways, we all do.
If the US economy is not valued in peoples’ minds, a Japanese person may say “I won’t pay 80 Yen for 1 US Dollar. I will only pay 75.” If the bank can’t sell 1 US Dollar for 80 Yen anymore, they will have to reduce the price to 75 Yen. In this way, the value of currencies is constantly changing with the world economy. The exchange rate is even changing by tiny fractions every few seconds. Every government also has a central bank which is able to create and destroy their own money.
Creating too much of a currency causes it to become less valuable and can lead to inflation. Destroying too much means other banks have less to work with, so they must raise their interest rates for loans to compensate. This can hurt the economy as people will be less likely to buy things. The central bank is tasked with the balancing act of keeping the currency stable. (for more info, see How can we use all of this to our advantage? If you speculate that the currency your money is in will become less valuable or that another currency will become more valuable, you can convert what you have into another currency. If the exchange rate changes like you though it would, you can then buy your currency back and get more of it.