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Exchange Rates
monkey_man_444
Why are exchange rates so crazy? Why is the dollar so weak? I don't understand how they decide what the exchange rates are. Do they just pull a number out of a hat and that is the new exchange rate?
tisha![[Admin]](http://www.hubdub.com/images/icon_admin.gif "This user is an admin"){kind=icon}
Nice question monkey man.
For a very unofficial answer, exchange rates are the net result of a few different factors in the economy of the local currency. These factors are all based on the movement of supply and demand curves.
1) Trade (exports/imports). eg at the moment, the Australia dollar is going way down because we export a lot of commodities, like coal, which people tend to steer clear of in times of economic uncertainty. So there is less demand for the Australian dollar and the exchange rate goes down.
2) Interest Rates - increasing the interest rate makes saving and foreign investment more enticing, bringing money into the economy and increasing demand so making the exchange rate go up.
3) Inflation - relative inflation rates also affects the economy's international competitiveness, so have an inverse affect to interest rates (ie inflation goes up, exchange rate goes down)
4) Speculation - there are traders in foreign currency markets, who buy and sell currencies based on what they believe is going to happen to a local economy. If they believe that a currency is going to depreciate, they will sell creating a surplus supply of this currency and causing the depreciation that was initially speculated.
Anyone else care to contribute or correct me?
For a very unofficial answer, exchange rates are the net result of a few different factors in the economy of the local currency. These factors are all based on the movement of supply and demand curves.
1) Trade (exports/imports). eg at the moment, the Australia dollar is going way down because we export a lot of commodities, like coal, which people tend to steer clear of in times of economic uncertainty. So there is less demand for the Australian dollar and the exchange rate goes down.
2) Interest Rates - increasing the interest rate makes saving and foreign investment more enticing, bringing money into the economy and increasing demand so making the exchange rate go up.
3) Inflation - relative inflation rates also affects the economy's international competitiveness, so have an inverse affect to interest rates (ie inflation goes up, exchange rate goes down)
4) Speculation - there are traders in foreign currency markets, who buy and sell currencies based on what they believe is going to happen to a local economy. If they believe that a currency is going to depreciate, they will sell creating a surplus supply of this currency and causing the depreciation that was initially speculated.
Anyone else care to contribute or correct me?
Thanks! I was just wondering because sometimes you see questions about exchange rates and I wanted to know about them so I could make a better prediction!
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