Who Sets Currency Exchange Rates?

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Currency exchange rates are mostly set by the public, though some countries have currency rates that are tied to the currency of other countries. Learn how countries that take in more money than they are sending out will have stronger currencies with information from a financial adviser in this free video on currency exchange.

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Video Transcript

If you ever traveled abroad and had to exchange currency from your host country into other countries. Hi this is Roger Groh of Groh Asset Management. Do you ever think about why that rate is what it is. And who sets it. Well there are two camps on this. There are some countries which have fixed their currencies to other countries. An example would be the Hong Kong dollar being fixed to the U.S. dollar. It's part of government policy to maintain that peg. On the other hand for the vast number of other currencies it's the public that sets the price. The reason, the public has a whole lot more money then the governments. If you want an example look at the U.S. dollar against the Euro or Yen or perhaps Swiss franc over the last couple of years. And you can get a sense of just how many dollars traded and the volatility. Believe me, we the public, have a lot more money then the governments. And we the public, are going to dictate what we are going to pay for a specific currency. If there's one rule of thumb, if a country is taking in more money then they are sending out and they have a positive current account their currency is likely to be stronger. On the other hand if a country is constantly sending out it's capital then that currency is likely to weaken. It's a natural phenomena and sort of self correcting, albeit painful on both ends. I'm Roger Groh at Groh Asset Management thank you very much for spending time with me.

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