What Is a Convertible Currency?

What Is a Convertible Currency?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

A convertible currency refers to a type of currency that can be freely traded on the forex (foreign exchange market) without government restrictions. With convertibility, you can swap this particular currency for another without limitations. Most worldwide currencies, such as the American dollar (USD), the Euro (EUR), or the British pound (GBP), are considered convertible currencies because they can be traded freely and have a global acceptance level. These currencies play a substantial role in international trade and investing. They increase the ease and speed of transactions by avoiding the need for direct barter processes.

Related Questions

1. Are all international currencies convertible?

No, not all international currencies are convertible. Countries with strong governmental control over the economy and unstable political climates often have non-convertible or ‘blocked’ currencies. An example includes the Cuban Peso (CUP).

2. How does a currency become convertible?

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The convertibility of a currency mostly depends on the economic policies set by a country’s government. If a government decides to allow its currency to be freely traded without restrictions, it becomes a convertible currency. This usually comes about when a country has a stable and thriving economy.

3. What is a non-convertible currency?

A non-convertible currency, sometimes known as a ‘blocked’ currency, is one that cannot be traded freely on the forex market due to government restrictions. These currencies can’t be easily exchanged for foreign currencies, which can limit international trade.

4. What are the advantages of a convertible currency?

A convertible currency facilitates international trade and investment. It makes it easier and faster to perform transactions as it eliminates the necessity for direct barter processes. Such currencies are more stable and reliable, adding an extra level of confidence for international traders and investors.

5. What can impact the value of a convertible currency?

Several factors can impact the value of a convertible currency. These include economic indicators like inflation and interest rates, political stability, market speculation, and the balance of trade between countries.