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Where And How Are Exchange Rates Determined?

HomeWhere And How Are Exchange Rates Determined?

Exchange rates are a vital component of the global economy. Throughout history, it’s through the exchange of different currencies that many different nations were able to trade. Today, due to globalisation, the exchanging of currencies has become more and more common. Where and how exchange rates are determined is something many people often wonder about. This article will outline exactly how the determination of currency rates are determined.

Broadly speaking, the fundamental driver of exchange rates are the forces of the market. This means that the laws of supply and demand will dictate what the given exchange rate for a day is. These laws of supply and demand are influenced by a whole myriad of different things. Political events, trade barriers as well as the growth in a given country are a few factors that play a role in determining exchange rates.

To understand this process better, if there were a great investment opportunity in a foreign country there would be a lot of people trying to exchange their currency so that they could take part in the great investment. Because of this, there will be a huge demand for the particular foreign currency, meaning that it would become more expensive. If the central bank of the foreign country doesn’t print more money, the finite supply of currency that they have will become more expensive due to more demand. This is because as demand increases, more and more people are willing to pay higher prices thus the exchange rate increases.

In reality, the determination of currency rates is not an exact science. There are always different events occurring each and every minute that influence rates. Furthermore, the people that determine rates are usually analysts at large banking institutions that have to use their own personal judgment on setting rates. This is where the question of where the currency rates are set comes into play.
Large banks are usually the facilitators of the world’s foreign exchange market. Behind these banks are dedicated teams that are constantly analyzing world events, new trades and other pertinent factors so that they can determine a competitive exchange rate. What these banks are trying to do is to make the most profit possible, by setting an exchange rate that will allow them to do so.

Thus, how exchange rates are determined are based on macroeconomic events whether they be political or economical. From there, the where equation of how rates are determined is based off of how analysts at large banking institutions interpret these events, as they are the ones that ultimately choose the exchange rate for the day.

The foreign exchange market is very complex and this article just scraps the surface of an increasingly complex financial field. However, by understanding the basics of what exactly determines these exchange rates, one will be able to have a better understanding of the world economy. It’s because of exchange rates that we are able to enjoy the global economy that we have today. Through various different world events and analyst recommendations, the rates that we witness each and every day are set.

Irrespective of what the exchange rate is today you’ll be sure to get the very best rates from Value Currency Exchange Brisbane