What is Currency Translation?

Dale Marshall

Currency translation is the practice of converting accounting values shown on a financial statement in one currency to a different currency, usually for the purposes of meeting financial reporting requirements. This is routine for multi-national corporations where the financial statements of subsidiaries located in other countries must be translated to the currency of the parent's headquarters country. Another commonly-understood meaning of currency translation is the process of converting a sum of one country's money into an equivalent value of another nation's currency, usually to facilitate tourism.

Various types of currency.
Various types of currency.

There are many factors that make currency translation a lucrative yet risky business, especially considering the recessions that periodically afflict local and global economies. A country's currency can lose value when its economy is weak, due to political instability, or due to the government's inflationary practices. This can lead to problems both for big businesses and individual tourists. For example, a company which builds a facility in another country, and then sees that country's currency lose value, loses some of the original value of its investment. The loss may only be "on paper," but it will influence dividends paid to stockholders, and may have an adverse impact on the company's stock price.

Currency translation can also be a factor in international relations. Most countries let their currencies "float" against all other currencies, meaning that the value of their currency is set by the free market. Some countries, however, will link their currencies to another, most commonly the United States Dollar (USD). The problem with this practice is that it distorts the true value of the linked currency, especially if a country's internal conditions would otherwise lead to its currency losing value, as described above. In addition, it usually allows the linking country to stockpile reserves of foreign currency, most notably American dollars, at a discount.

Most countries have a lively currency translation business catering to the tourist trade. The rate of exchange for these conversions is usually set by the free market in money markets, often directly influenced by the interest rate banks pay for short-term deposits. These businesses make their profit simply by adding a small commission to the exchange rate. In some countries, however, the government controls all currency translation transactions, usually setting an artificial exchange rate. These transactions also permit the host country to accumulate vast reserves of foreign currency at what are sometimes bargain-basement prices.

Major newspapers publish tables of exchange rates, updated daily, which are used as the basis for currency translation. These tables list major world currencies and their individual values in terms of USD. They are consulted regularly by banks, companies with business interests in other countries, and anyone with an interest in the travel industry. The values of most currencies fluctuate daily, and since the global economy includes transactions every day in the hundreds of billions of USD involving all the world's currencies, even the most minor changes in any country's currency value can mean gains or losses of millions of dollars.

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