An exchange rate is the value of one country’s currency compared to another. Every country has a currency that holds value and is comparable to others, thus determining how much you get if you exchange one for the other.
Each currency’s value depends on those countries’ economic status, monetary policy, global trade, and political situation.
How are exchange rates determined?
Exchange rates fluctuate based on global market conditions, including supply and demand and economic factors determining exchange rates.
As supply and demand go up, the currency’s value goes up; the same is true for when supply and demand go down, so does the currency’s value. Each currency is directly linked to its country’s economic situation. When the country is doing well, so is its currency and vice versa.
Why do exchange rates change daily?
Global markets change minute by minute as they follow global trends of supply and demand, interest rates, international trade, and political factors.
Is a higher or lower exchange rate better?
If you are buying money with your country’s currency, then a higher exchange rate on your currency is beneficial because it will get you more money in foreign exchange. If you are selling, then you want a lower exchange rate, meaning you will get more foreign exchange for what you sell.
How does inflation affect exchange rates?
Inflation directly impacts exchange rates because it can cause interest rates to increase rapidly or fall very low. Fiat currency (owned by governments) has not been backed by gold since the 70’s; therefor inflation tends to fluctuate and rise quickly compared to what we have seen in the past.
What is a floating exchange rate?
It’s when the exchange rate varies based on supply and demand in the FX market compared with other FX markets. Meaning, there is a lack of consistency, and the value of an exchange rate can change dramatically based on global economic factors.
What is a fixed exchange rate?
It’s when a central bank bases the value of its currency on a specific factor or commodity. In the past, this was gold. However, countries rarely follow this model because most countries have their government back their currency (fiat currency).
How to find an exchange rate?
It’s always beneficial to keep up with global news to help give you insight into how the exchange rate will vary over the next several days/weeks, and months. Many people earn a living by keeping up with economic and political trends to determine whether they buy or sell their money.
An excellent place to start is with a local Foreign Exchange company such as Canam Currency. The banks offer them a discounted rate on foreign exchange, thus charging you less than what the banks would provide you directly.
