Understanding Currency Exchange Rates

International currency exchange rates are used to determine the value of one country’s currency against another country’s currency. Supply and demand is what determines rates. A value is agreed upon by market participants.

Most transactions occur on the Interbank market, and those who participate in it negotiate the agreed price. Exchange rates are important for maintaining a framework for everything related to commerce and trade, both nationally and globally. With that said, the rest of this article will discuss how exchange rates can influence economic decisions, planning decisions and the roles they place in such decisions.

Foreign trade is impacted by currency exchange rates. A international money transfer plays a role in determining the relative cost of goods. When a country’s exchange rate falls or rises against another’s rates, then the way trade and commerce is conducted can be impacted.

The base unit of currency is what exporters and manufacturers use to determine the price of their goods. Goods tend to become more expensive to foreign purchasers when exchange rates appreciate to a certain extent. This sometimes results in resources being reallocated because the demand for goods shift to cheaper suppliers.

Monetary policies that are set forth by central banks can impact exchange rates and so can a country’s economic conditions. This is because future and current expectations can be influenced by the supply and demand for the country’s currency.

Generally speaking, central banks are the ones in charge for providing stability for their country’s currency.

Currency PlanningEconomic planning in a country can be affected in a negative way if their currency exchange rate is not stable or if inflation occurs. Central banks sometimes steps in the currency markets to protect currency from excessive speculations or to enforce any economic mandates. In 2006, the Thai government displayed an example of how policies from a central bank can impact both the interconnected equity markets and exchange rates.

When a country’s exchange rate appreciates rapidly, then domestic exports can take a hit because they may become more expensive than imports. Not only that, but domestic producers may be faced with a threat if favourable exchange rates allows other countries to sell their products at a far cheaper price, which can lead to domestic producers being forced to go out of business. A good example of this is the argument between governments in the west, who many say the Chinese exchange rate is undervalued when compared to the rest of the world.

Business ExportingIn recent rates, China has amassed a massive trade surplus, and this can affect export based industries. Many companies in the United States have had to go out of business or open businesses overseas just so they can compete. However, low labour rates have also played a role in why some companies decide to open up plants and factories overseas.

There are many considerations and events and things that play a role in currency rates. Generally speaking, currencies trend whatever way economic fundamentals are going. Furthermore, conditions that affect the global equity markets can influence currency exchange rates. Don’t forget, central banks can alter interest rates and this too can impact currency exchange rates in either a good way or a negative way.