Conversion is the transformation of something into something else or the implementation of an equivalent exchange. In particular, converting (or converting) currencies means transferring a sum of money from one currency to another. We can say that the conversion is a kind of combination of restrictions and freedoms for those involved in foreign exchange transactions, when they exchange banknotes of one country for the corresponding signs of other countries.
In order for a country to be included in the global 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 ability to raise funds from abroad. On the other hand, foreign investors are also able to freely transfer abroad the money earned in the country and reinvest profits.
Currencies are divided according to the degree of convertibility into the following types:
Freely convertible currency (hard currency) is a currency that is freely and unlimitedly exchanged for banknotes of other states and countries. She, as a rule, has full internal and external reversibility, that is, the same exchange mode.
The scope of use of freely convertible currency exchange includes current operations that are related to daily foreign economic activity such as foreign trade exchange, non-trade payments, foreign tourism, as well as operations related to foreign investments or the movement of external loans.
The rate of freely convertible currency is set only as a result of open trading, which are held on the currency exchange. Thus, the state is deprived of the ability to artificially limit the value of the national currency or use currency corridors.
The only option the state has for intervention is a currency intervention, which the National Bank of the country can carry out. However, only market methods should be used, that is, reducing the value of the currency by increasing its supply on the exchange.
In the modern world, only a limited number of countries have a freely convertible currency: the USA, Great Britain, Japan, etc. (a total of only 17 countries). Currently, ICS is approximately 15% of all existing currencies.
The national bank of any country needs to create currency reserves in order to make international payments. A freely convertible currency is most suitable for this role. Some of them are called reserve currencies.
To carry out foreign trade and financial transactions, practically only US dollars, euros, Japanese yens, British pounds and Swiss francs are used, and almost 100% of the world's foreign exchange reserves are stored in these currencies.
A freely convertible currency, in turn, is an indicator of the economic stability of a 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 take part in financial transactions at the international level, but are not exchanged in other countries for any currency. They are called partially or partially convertible.
Forex trading is also conducted exclusively in freely convertible currencies. They have the greatest liquidity, and this makes it possible to quickly exchange one for another.