What Determines Exchange Rates
The simplest explanation for what determines exchange rates is the economic lesson of supply and demand. The two main systems for concluding what a country's exchange rate should be are the floating rate and the pegged rate. The floating exchange rate means the market changes according to the goods and services people are spending money on, which is directly associated with supply and demand. The pegged rate is unchanging, fixed according to another country's currency and managed by the government.
Other People Are Reading
-
History
-
After inflation set in decades ago, the U.S. dollar was no longer perceived as the most powerful currency and went on a downward slope, decreasing in value, while other countries continued to become more economically stable and valuable. However, it is still common for countries to base their currency rates on the U.S. dollar.
Significance
-
Exchange rates have an effect on how a country's balance of trade and export and import markets are perceived.
-
Function
-
Once an exchange rate is determined it influences a country's income intake by influencing inflation and interest rates.
Types
-
The floating exchange rate is usually used in countries with a stable economic market. The pegged exchange rate is more often used in those countries that are unstable.
Considerations
-
There are certain currencies that are most likely to stay stable and unchanging, including the U.S. dollar, Swiss franc, Japanese yen and the Euro.
-
