Foreign Exchange Currency Conversion

Euros are an example of an available foreign exchange currency.

Foreign exchange conversion takes place when one currency is exchanged for another. It is the buying and selling of one currency for another, as currencies are essentially commodities.

Floating Exchange

Most countries use floating exchange rates. In these situations, a currency's value solely reflects how much people will pay for it. It is simply supply and demand; if there is a high demand for a currency, its value rises, and vice versa.

Fixed Exchange

Some countries fix their exchange rates in tandem with other, more established currencies. With fixed exchange rates, the central bank constantly buys or sells the foreign currency at the specified rate. While fixed exchange rates reduce volatility, they also create artificial situations, which in turn can cause crashes.

Determining Demand

Imports and exports determine demand for a currency. If someone wants to import their goods into a country, they will sell their goods in that country's currency; when they change that foreign currency back to their home currency, they raise the demand for their currency a little bit. The converse is true for exports.

References

• Investopedia: Fixed Exchange Rates vs Foreign Exchange Rates
• European Commission: Eurostat: Exchange Rates and Interest Rates Explained