Rand Value: How is the Value of Currency Determined?

Rand Value: How is the Value of Currency Determined?

Currencies are used to exchange for goods and services, but how are they valued? In this helpful guide, we explore what defines the South African Rand. 

What is a ‘currency’? 

“Currency” is a term that refers to a medium of exchange for goods and services. While today people would traditionally use paper or coins (or digitised representations of paper or coins) when transacting either physically or virtually, societies have relied on many forms of currencies over thousands of years. For example, rare shells, livestock, and even gold denominations have served as currency. 

A currency must be able to satisfy three basic properties – it must be: 

  • A store of value (meaning that it can appreciate over time),  
  • A medium of exchange (meaning that it can be used to exchange goods) and 
  • A unit of account (meaning that goods can be priced to one unit of the said currency, or a smaller denomination – such as 90 cents of one South African Rand.) 

As a medium of exchange, a fundamental requirement for a currency to work is that all parties must accept its value when transacting. For example, a grocery store would be highly unlikely to accept seashells as payment for goods in modern times, but instead would accept a currency such as the Rand. 

Similarly, the valuation of real-world currencies (of which there are 180 recognised and unique currencies in circulation today) changes according to their standing, recognition, and acceptance.  

How is the Rand valued? 

The Rand is South Africa’s sovereign currency and is the default medium of exchange in which labour is paid for, goods can be exchanged with, and in which investments are based on within our country.  

While some currencies choose to ‘peg’ their value to another currency (such as the US Dollar), other currencies are instead valued based on several attributes. These can include, but aren’t limited to, South Africa’s economic performance (sometimes measured by the Gross Domestic Product or other activity such as mining or agricultural production), the amount of national debt the country incurs, political certainty or unrest, or what are called ‘outlier events’ such as national disasters.  

Exchange rates are often used to determine the value of the currency, while you could also look to measure a currency’s buying power which can be affected by inflation. 

What are exchange rates? 

To measure the value of the South African Rand, you might look to track the performance of the Rand against another currency such as the United States Dollar or the Great British Pound Sterling. Notably, when doing so, you might see different results based on how the comparison currency has performed. For this reason, many people also look to value the Rand against other ‘commodities’ such as gold, silver, or platinum. To see a broader depiction of how a currency performed, an investor might also compare the Rand to a ‘basket’ (group) of currencies as well. 

Exchange rates help investors and trading parties understand how to translate the value of one currency into another. For example, in August of 2020, one US Dollar was roughly worth 17,59 South African Rand. Exchange rates can be affected by a change in value in one or both participating currencies or commodities 

Remind me, what are interest rates? 

An interest rate is the amount of interest due per period when money is borrowed. For example, in order to make money, a bank may charge a certain interest rate on a loan for as long as the sum of money in question is borrowed. 

Interest rates are usually defined by what is called the Prime Lending Rate, which is determined by a country’s Central Bank or principal Financial Regulator. To learn more, you can read our in-depth guide as to how these interest rates work here. 

What is inflation? 

Inflation is a measure of the rate at which the average price level of goods and in an economy increases over a period of time – or, conversely, how the purchasing power of a currency decreases. Inflation is most often expressed as a percentage.  

Inflation is sometimes measured in what are called ‘indexes’, which tracks how much of one particular currency would be needed to purchase an item. One notable index is called the ‘Big Mac’ index, which tracks how much someone would need to spend in order to buy a Big Mac at McDonald’s. 

What do I need to know about inflation and interest rates to plan for the future? 

Tracking inflation and interest rates are often difficult, as the events that can alter them are often unforeseen or are tricky to anticipate. However, you can rely on the knowledge that inflation will typically increase over time, and that interest rates will vary and change on occasion. With this knowledge, you can take a few financial principles forward, and rely on your chosen financial advisor for tailored advice. 

To plan ahead, there are several things you can do. Perhaps the most powerful strategy you can make is to set up an emergency fund, where you can construct your own savings plan to fall back to in the event of an emergency. 

In order to secure your financial position, it is also important to learn more about debt, and how you can manage your borrowing with sound principles.  To help you learn more about debt reduction strategies, debt consolidation, and more, we’ve prepared a helpful guide here. 

Lastly, in order to secure your family’s wealth once you have passed on, it is important to set up an estate and a letter of wishes. Doing so can help you secure your wealth and your family’s future financial surety. 

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