How is the exchange rate for currencies decided?
Answers:
It's usually determined on foreign exchange markets. Currency pricing moves in a similar fashion as stocks - the price moves based on what someone will pay.
"Currency prices are affected by an assortment of economic and political conditions, but almost certainly the most significant are interest rates, global trade, inflation, and political stability. Governments participate in the market by either flooding the market with their domestic currency in an effort to decrease the price or, conversely, buying in order to elevate the price. This is known as central bank intervention. Any of these factors, as well as large market orders, can initiate high volatility in currency prices. However, the size and volume of the forex market make it impossible for any one entity to "force" the market for any length of time."
In a very macro method that the stock market is handled. People want to "buy" and "sell" currency, and they set the price, just like the price of a stock.
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Based on the market. For a daily conversion go to oanda.com It will give you the conversion rate daily, weekly, monthly, for all the different currencies out there.
Once again it is down to that old economic favourite - supply and demand.
Demand in a currency is driven by things such as interest rates and strength of the economy in general - so for example if a country raises its interest rates, more people wish to invest in that country, this reduces the supply of the currency (there is a limited amount theoretically) and this drives the exchange rate up.
Traded through the markets according to supply and demand but reflecting the underlying economic fundamentals such as differences in interest rates between the currencies which help to set the underlying price.
e.g If a interest rates rise in a country its currency becomes more expensive (Exchange rate rises). Otherwise you could make profits by converting your money into that currency, depositing it to get interest and convert your money back.
The markets wont let that happen except to a very small degree in the short term where it is possible to make profits on short terms differences through arbitrage trading.
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