EXCHANGE RATE

CURRENCY RATE


Currency / Exchange rate, we all know what it is, isn't it?
Well!! I would try to explain my views on this topic. No research only some basic fundamentals....

Currency or Exchange Rates:~
This is nothing but the selling or buying price of a particular currency with other one. If I buy Japanese Yen with dollar I may have to pay 1 dollar for 80 Yen.
This is what we call currency rate.
Example: 1 Euro (EU) ~ 60 Rupee (Indian)
1 Dollar ~ 48 Rupees (Indian)

So how the value is decided?
Let us assume the cost of a hamburger (MC Donald’s :)) cost 3 dollar in US, 240 Taka in Bangladesh, 120 Rupees in India.
So 1 Us dollar = 40 Rupees = 80 Taka.
And 1 Rupees = 2 Taka.

So we decide the rate on the basis of a good, correct!!!
In earlier markets we used to do the same thing, purchasing gold and deciding the exchange rates on basis of it. Probably US were the first country to implement this technique.

This worked but after economic instability they decided to go for a more liberal and dynamic approach.

There are two main systems used to decide countries exchange rate.

A) Floating Exc .
B) Peggy Exc.

A) Floating exchange, is a system where the value of money is decided on selling and buying of stuffs. More precisely market, FDI, exchanges, inflations, import/export has direct causal effect on this system. 'Supply and demand’ has a direct relationship on this system.

B) This is a fixed system where the government decides the value of the currency.

C) A third kind of exchange system is mixed, a cocktail of the above systems.

The Floating exchange system is proved to be better system, especially for the developed nations.
(Euro is another initiative, where the nations share a same currency thus reducing the chance of exchange rate flactuations).

The Peggy system is normally implemented by the Developing nations to control inflation and market. But this can be a boomerang also. The central bank(for Govt.) has to buy or sell foreign currency to achieve a good reserve of Foreign Revenues. So for increasing/decreasig the facevalue of the nation's exchange rate the bank might have to sell/buy the revenue.

This may run in a dangerous situation for the country. In other hand, interest rate, inflation can also threat this type of systems. The buyer can loose confidence on the local currency and buys a foreign currency which is more stable, thus causing a economic disaster.


Next time whenever you travel to a foreign nation and exchange your currency in forex, you kow, you are also influencing the exchange rate of that nation.