All About International Exchange Rates

International currency exchange rates tell how much one unit of currency can be exchanged for another currency. Also, this can be floating – continually changing based on a multitude of factors. They could also be pegged to another currency; in which case they still float. However, they move in tandem with the currency they are pegged with.

Having knowledge of the value of a home currency linked to different foreign currencies helps investors to analyze assets priced in international dollars. For instance, for a U.S. investor, being familiar with the dollar to the euro exchange rate is essential when choosing European investments. A falling U.S. dollar boosts the value of foreign investments the same as a surging U.S. dollar might affect the value of one’s foreign investments.

Floating and Fixed Exchange Rates

A trader may define currency prices in two main ways – a floating rate and a fixed rate. 

For a floating rate, one can determine this by the open market through supply and demand on global currency markets. This means that if a demand is high, the value will most likely increase. On the other hand, if the demand lessens, this pushes the currency price lower. Some technical and fundamental factors will know what people see is a fair exchange rate and alter their supply and demand, respectively.

Then, traders can determine a fixed or pegged rate by the government through its central bank. Also, they set the rate against another major currency like the U.S. dollar, euro, or yen. In addition to that, the government needs to buy and sell its currency against the pegged currency to maintain its exchange. China and Saudi Arabia are some of the countries that choose to peg their currencies to the U.S. dollar.

 After the fall down of the Bretton Woods system between 1968 and 1973, the currencies from most of the world’s major economies can finally float freely. And now, most exchange rates are not set but determined by on-going trading activity in the world’s currency markets.

Affecting Exchange Rates

The amount of demand there is to supply of a currency will decide that currency’s value in relation to another currency. For instance, if the demand for U.S. dollars by Europeans boosts, the supply-demand relationship will fuel an increase in the price of the U.S. dollar with the euro.

Aside from that, countless geopolitical and economic announcements have an impact on the exchange rates between the two countries. However, some of the most common include interest rate changes, inflation reports, unemployment rates, commodities, gross domestic product numbers, and manufacturing data.

Short-term moves in a floating exchange rate currency bounce on rumors, disasters, and everyday supply and demand for the currency. If supply exceeds demand, that currency will fall. And if demand outstrips supply, that currency will move up. Then, extreme short-term moves can have an outcome of intervention by central banks, even in a floating rate environment. As a result, while most major global currencies are considered floating, central banks and governments might step in if a nation’s currency grows too high or too low.