On February 3, 1690, the Massachusetts Bay Colony was said to have issued the first paper money in the U.S. in order to pay for military action against Canada during King William’s War.

Massachusetts was a truly pioneering colony when it came to money, as they were also the first to mint their own silver coins in 1652, despite a British law against it. The paper money created in 1690 was called a bill of credit, and represented the colony’s obligation to the soldiers. The soldiers could spend or trade the colony’s IOU just like silver and gold coins.

During the revolution of 1775, colonial leaders tried to replicate Massachusetts’ paper experiment on a wider scale, but the newly-christened continentals lacked any backing, such as silver or gold. On a small scale it may have worked, but so much money was printed that rapid inflation stripped them of all their value.

Less than 100 years later, two competing currencies were used to finance the opposing sides of the Civil War. Their values fluctuated with the fortunes of the war. Yet, it wasn’t until the National Banks Act after the civil war that the U.S. government introduced a monetary system where banks could issue paper notes based on their holding of government bonds. These disparate currencies were taxed out of existence in the following decades and replaced with national bank notes, giving the U.S. its first uniform paper currency.

To learn more about monetary policy, see “The Fed’s Tools for Influencing the Economy.”

• retail forex brokers
• central banks
• commercial businesses
• banks

In countries using a centralized banking model, interest rates are determined by their respective central banks.

In order to determine the interest rate, a government’s economic observers create a policy that helps ensure stable prices and liquidity. This policy is routinely checked so that the supply of money within the economy is neither too large (causing prices to increase) nor too small (causing prices to decrease). In the U.S., interest rates are determined by the Federal Open Market Committee, which consists of the seven governors of the Federal Reserve Board and five Federal Reserve Bank presidents. The FOMC meets eight times a year to determine the near-term direction of monetary policy and interest rates.

For further background on the Federal Reserve’s functions, see our tutorial on The Federal Reserve.

Retail banks are typically the first financial institutions to expose money to the economy, and therefore they are the principal instruments used by the central bank to manipulate the money supply. Put simply, the central bank is able to regulate the supply of money to the end user (individuals and companies) by adjusting interest rates on the money it lends to or borrows from retail banks.

If the monetary policy makers wish to decrease the money supply, they will increase the interest rate, which makes it more attractive to deposit funds and reduce borrowing from the central bank. Conversely, if the central bank wishes to increase the money supply, they will decrease the interest rate, which makes it more attractive to borrow and spend money.

For further reading on interest rates, see “Interest Rates and Your Bond Investments,” “Forces Behind Interest Rates,” and “How Interest Rates Affect The Stock Market.”

The time value of money, or TVM, assumes a dollar in the present is worth more than a dollar in the future because of variables such as inflation and interest rates. Inflation is the general increase in prices, which means that the value of money depreciates over time as a result of that change in the general level of prices.

Changes in the price level are reflected in the interest rate. The interest rate is charged by financial institutions on loans (i.e., a mortgage or car loan) to individuals or businesses and TVM is taken into account in setting the rate.

TVM is also described as discounted cash flow (DCF). DCF is a technique used to determine the present value of a certain amount of money when received at a future date. The interest rate is used as the discounting factor, which can be found by using a present value (PV) table.

A PV table shows discount factors from time 0 (i.e., the current day) onward. The later money is received, the less value it holds, and $1 today is worth more than $1 received at a date in the future. At time 0, the discount factor is 1, and as time goes by, the discount factor decreases. A present value calculator is used to obtain the value of $1 or any other sum of money over different time periods.

For example, if an individual has $100 and leaves it in cash rather than investing it, the value of that $100 declines. However, if the money is deposited in a savings account, the bank pays interest, which depending on the rate could keep up with inflation. Therefore, it is best to deposit the money in a savings account or in an asset that appreciates in value over time. A PV calculator can be used to determine the amount of money required in relation to present versus future consumption.

To learn more about the basics of investing, see our Investing for Beginners crash course.

All currencies are traded in pairs. The first currency in the pair is called the base currency while the second is called the quote or “counterpart” currency. Usually the most dominant currency, in terms of the other currencies against which it trades, is quoted first. This is a matter of perspective because, from a local point of view, the local currency is the most dominant. One always wants to know just how much of the foreign currency one can get when exchanging the local currency. An American may want to know how many euros he can get for his dollar or, if he was traveling to Japan, how many yen he can get. (Interested in forex but don’t know where to start? Check out Top 7 Questions About Currency Trading Answered.)

However, based on international convention among banks, certain currencies have been assigned trading dominance. The euro represents some 17 countries that have joined the euro system and, therefore, has become the dominant base currency against all other global currencies, so it is quoted first. For example, the euro, represented as EUR, will be identified as EUR/USD, EUR/GBP, EUR/CHF, EUR/JPY, EUR/CAD, etc. All have the EUR acronym as the first currency in the sequence.

The British pound, originally the main currency of the world during the heights of the British Empire, is next in the hierarchy of currency name domination. The major currency pairs versus the GBP are identified as GBP/USD, GBP/CHF, GBP/JPY, GBP/CAD. Apart from the EUR/GBP, the GBP is usually the first currency quoted when it is involved in a currency pair. Because the U.S. dollar is the de facto world reserve currency since the end of the Second World War, and because commodity prices such as gold and oil are quoted in dollars, one could argue that the dollar is really the dominant currency of the world. In terms of convention, however, it ranks third in dominance and is quoted first against the Canadian dollar, Japanese yen and Swiss franc. In short, tradition and convention seem to play larger roles in the hierarchy of currency pairs than the relative economic strength of the economies that the currencies represent.(For further reading, see Using Currency Correlations To Your Advantage.)

During a trade deficit, the U.S. dollar generally weakens. Of course, there are numerous inputs that determine currency movements in addition to balance of payments, including economic growth, interest rates, inflation and government policies. A trade deficit is a negative headwind for the U.S. dollar, but it can still appreciate due to other factors.

A trade deficit means that the United States is buying more goods and services from abroad than it is selling abroad. Foreign firms end up with U.S. dollars. Typically, they use these U.S. dollars to purchase Treasury securities or other U.S.-based assets, particularly during periods of financial stability and growth.

If imports continue to exceed exports, the trade deficit continues to worsen leading to more outflows of U.S. dollars. The flow of dollars out of the country leads to weakness for the currency. As the dollar weakens, it makes imports more expensive and exports cheaper, leading to some moderation of the trade balance. As the currency continues to weaken, it makes U.S. dollar-denominated assets cheaper for foreigners.

The U.S. has run persistent trade deficits since the mid-1980s, but this has not translated into significant dollar weakness as would be expected. The primary reason is the U.S. dollar’s status as the world’s reserve currency. Dollar demand continues, as it plays a major role in global trade and reserves for central banks all around the world.

Major economies that issue their own currency, such as the European Union, Japan and England are in a similar space, where they can run persistent trade deficits. Countries that do not have the faith of the investing community are more prone to seeing their currencies depreciate due to trade deficits.

The New Zealand currency is known as the New Zealand dollar. The currency was decimalized in 1967, and divided into 100 parts or cents. Before 1967, the currency was called the New Zealand pound. But since its decimalization, it has been called the New Zealand dollar. The currency, affectionately referred to as the Kiwi, trades under the symbol NZD or NZ$.

Since 1999, the New Zealand government has produced polymer or plastic versions of the New Zealand dollar, which has made the note more secure against counterfeiting. In addition, the new polymer composition has increased the longevity of the note. It is estimated that the polymer note lasts four times longer than regular linen or paper notes. Interestingly, the polymer note can go through a washing machine without suffering any material damage. Will other countries around the world follow suit and move their currencies from paper to polymer?

(For more on this topic, see What are the most common currency pairs traded in the forex market?)

Traders are constantly monitoring various economic indicators to identify trends in economic growth. Some of the most watched economic indicators include the Consumer Price Index, housing starts, gross domestic product and the employment report, which contains a variety of data and statistics regarding the employment information of the market.

The employment report is released on the first Friday of every month by the Bureau of Labor Statistics, providing data covering the previous month. The report contains information on unemployment, job growth and payroll data, among other statistics.

The most important payroll statistic that is analyzed from the report is the non-farm payroll data, which represents the total number of paid U.S. workers of any business, excluding general government employees, private household employees, employees of nonprofit organizations that provide assistance to individuals, and farm employees. This data is analyzed closely because of its importance in identifying the rate of economic growth and inflation.

As with other indicators, the difference between the actual non-farm data and expected figures will determine the overall impact on the market. If the non-farm payroll is expanding, this is a good indication that the economy is growing, and vice versa. However, if increases in non-farm payroll occur at a fast rate, this may lead to an increase in inflation. In forex, the level of actual non-farm payroll compared to payroll estimates is taken very seriously. If the actual data comes in lower than economists’ estimates, forex traders will usually sell U.S. dollars in anticipation of a weakening currency. The opposite is true when the data is higher than economists’ expectations.

To learn more, see “How to Trade Forex on News Releases,” “A Guide to Conference Board Indicators,”and “Economic Indicators to Know.”