How is the foreign exchange rate calculated?
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Floating exchange rate
If demand is low, then its rate drops. What impacts this supply and demand is a complex web of economic and political factors, including things such as changes to interest rates, unemployment, inflation, movements in gross domestic product (GDP) and so on.
Fixed exchange rates
Some countries choose to fix their exchange rate by tying its currency to another country’s currency.
This keeps the foreign exchange rate for the native currency more certain, but has particular impacts on what a central bank can do in terms of adjusting interest rates and other issues.
In general, most industrialised nations have a floating exchange rate, whereas smaller and developing nations may choose to fix or ‘peg’ their currency to a major currency like the US dollar.
What is the foreign exchange rate?
The exchange rate is simply the price of one currency in terms of another.
Conversely, if you're selling abroad this will increase the cost of your products/services, which could impact sales.
Who sets the foreign exchange rate?
The setting of exchange rates is complex, but as explained earlier is essentially decided by supply and demand of a currency, which in turn is dictated by the behaviour of investors.
Updated on 08/02/2022.