How are exchange rates determined?

[Glen48]

How is the Exchanged rate worked out? How do they decide what one currency is worth compared to another and how do they all inter- relate?

 

[theasxgorilla]

How is the Exchanged rate worked out? How do they decide what one currency is worth compared to another and how do they all inter- relate?

You know on Facebook where you can choose the status of your relationship and some people who can't clearly define theirs have their status set to "it's complicated"??? Well, re: forex, it's complicated. I wish anyone trying to explain this the best of luck.

 

[Glen48]

I was worried it might have some think to do with graft and corruption, Bush Lawyers, Bailouts, Ponzi scheme, GDP ( adjusted for inflation of course)
the Pound not weighing a Pound, the Floating of the OZ Dollar when a Greenback will float better.
Makes it a lot easier to work out FX trading now.

 

[theasxgorilla]

Seriously though its different for each currency pair, and some pairs have no apparent direct relationship to one another, the Swedish Crown and the Aussie Dollar for example. But if you're following the relative story of each country and have no reasonable expectation that something is going to come out of left field you can make a right play from time to time:

 

[tayser]

It's determined by people agreeing on prices, just like the price of an equity - an order on the ASX is not executed if the BID and ASK don't match - exactly the same with FX. Big news announcements usually move the market in certain directions, but mostly an FX pair will move in waves - making it enticing for technical traders.

 

[tech/a]

Seriously though its different for each currency pair, and some pairs have no apparent direct relationship to one another, the Swedish Crown and the Aussie Dollar for example. But if you're following the relative story of each country and have no reasonable expectation that something is going to come out of left field you can make a right play from time to time:

It's determined by people agreeing on prices, just like the price of an equity - an order on the ASX is not executed if the BID and ASK don't match - exactly the same with FX. Big news announcements usually move the market in certain directions, but mostly an FX pair will move in waves - making it enticing for technical traders.

Both of these replies make perfect sence.

Personally I dont know the answer but always thought that all currency was based against the USD.

So if the AUD fell against the USD and the currency it was paired with
(1) Rose against the USD,
(2) stayed the same
or
(3) Fell to a lesser extent

Then the AUD in the pair it was with would fall. So the chart would see a positve move relative to the stronger currency. If the AUD was stronger then the chart would rise if it was weaker than the paired currency it would fall,(The chart).
and Vice Versa.

Probably way off the mark.

 

[>Apocalypto<]

what determines the value of an exchange rate

The global market for foreign exchange currencies is massive! - Hundreds of billions of £s and $s are traded in the dealing rooms each day. The market is open 24 hours a day for people, companies and governments needing foreign exchange to finance their transactions. Money now moves round the international financial system at tremendous speed (aided by the spread of computer technology and the gradual abolition of exchange controls between countries). Speculative activity in the market is a major determinant of a currency's value.

Short and long-term movements in the exchange rate, like any price, are caused by changes in market demand and supply conditions

Demand for Sterling

The demand for sterling (pounds) in the FOREX markets comes from four main sources:

* UK goods and services are exported overseas - creating an inflow of currency into to the UK which needs to be turned into sterling
* foreign investment flows into the UK economy
* market speculators decide they want to purchase pounds in the expectation of making a profit
* official buying of the currency by the central bank

An outward shift in the demand for sterling will cause an appreciation in the currency

Supply of Sterling

Sterling is sold on foreign exchange markets when

* goods and services are imported (domestic consumers and firms sell sterling to finance their purchase of imports or when they go overseas on holiday)
* speculators sell pounds for another currency
* investment capital flows out of the UK seeking a better rate of return
* central banks go into the market and sell pounds to buy other foreign currencies

When the demand for sterling is high relative to supply, sterling goes up in value (an appreciation). The reverse is true when the market supply of pounds exceeds the demand. (A depreciation). Consider the diagram below which shows the effect of an outward shift in market supply of sterling against the Euro. As a result we see a depreciation in the currency's value.

Fundamental factors that drive an exchange rate

INTEREST RATES

Interest rates have a large effect in a world where financial capital can move freely between countries.

When a country's interest rates are high relative to elsewhere this attracts inflows of money into a country seeking to take advantage of the high interest rates. This "interest differential" boosts the demand for the currency and can cause its value to rise.

ECONOMIC GROWTH

Countries experiencing a deep recession often find that their exchange rate is weakening. Traders in the currency markets may take the slow growth to be a sign of general economic weakness and "mark down" the value of the currency as a result.

On the other hand, economies with strong "export-led" growth may see their currency's rise in value. Japan is a good example of this in recent years. The Euro was weak during the first six months of its existence in part because the financial markets were worried about the slow growth of the European economy and the persistently high level of unemployment.

INFLATION

In the long run, those countries with higher than average inflation see their exchange rate fall. When inflation is high, a country becomes less competitive in international markets causing a fall in exports (a demand for a currency) and a rise in imports (a supply of currency overseas). A fall in the exchange rate may be needed to restore a country's competitiveness in overseas markets.

THE BALANCE OF PAYMENTS

Selling exports represents a demand for the domestic currency from foreign importers. When US consumers but British Whisky they supply dollars and this is eventually translated into a demand for pounds.

Similarly when UK consumers buy imports, they supply their own currency and this is eventually translated into a demand for foreign currencies. If a country is running a substantial trade surplus there is a large demand for the currency and its value should appreciate. By contrast a massive trade deficit usually causes the currency to lose value.

MARKET SPECULATORS

Special factors (such as political events, changing commodity prices etc.) can have an effect on a currency. In addition the power of market speculators has grown. When speculators decide that a currency is going to fall in value, they sell that currency and buy ones they anticipate will rise in value.

It is difficult for government's to offset the power of speculators because their reserves of foreign currencies are very small compared to daily turnover in the market. We saw in 1997 and 1998 speculative attacks on currencies in Asia and seven years ago, the pound was forced out of the European exchange rate mechanism because of speculative selling of the pound.

 

[tech/a]

Excellent great reading.

Thanks for the detailed explaination.Apocalypto

Consider the diagram below which shows the effect of an outward shift in market supply of sterling against the Euro.

Its a little transparent!

 

[>Apocalypto<]

Excellent great reading.

Thanks for the detailed explaination.Apocalypto

Its a little transparent!

sorry I was a little lazy to cut and paste all the diagrams. but that seemed to be a very good explanation of how it all worked.

 

[MRC & Co]

Consider the diagram below which shows the effect of an outward shift in market supply of sterling against the Euro. As a result we see a depreciation in the currency's value.

This is basically what is meant.

Supply increases, price (currencies value) decreases (depreciates).

Now who wants to have a crack at the elasticities?

 

[Page]

The exchange rates are decided on the bases of the import and export and production of that product within the country and internationally. And regarding currencies it is decided on the bases of its printing and usage.

 

[Glen48]

I tried to buy USD today 27/12 and my Broker web site told me the market was closed???
I assume "cos the USA was on hols. ????

 

[Glen48]

Any one care to guess where FX will go...I think USA up for awhile but look for a sign to make in collapse over night, GBP down and more down AUD hold and go down after next IR drop in January ....

 

[theasxgorilla]

sorry I was a little lazy to cut and paste all the diagrams. but that seemed to be a very good explanation of how it all worked.

It was a good explanation!

Which factors explain the EUR/GBP exchange rate at the moment? It's nearly at parity, a record low for the GBP. I've gone silly over Christmas buying up big on Amazon.co.uk and figuring out how to get Dell.co.uk to deliver to the continent. The UK is on sale!

 

[knocker]

It was a good explanation!

Which factors explain the EUR/GBP exchange rate at the moment? It's nearly at parity, a record low for the GBP. I've gone silly over Christmas buying up big on Amazon.co.uk and figuring out how to get Dell.co.uk to deliver to the continent. The UK is on sale!

Well I know they went crazy at high street yesterday.

 

[Macquack]

Speculative activityin the market is a major determinant of a currency's value.

I remember years ago, the Indonesian rupiah crashed severely .

At the time, I thought the Wall Street boys must have finally agreed on their christmas vacation destination (Bali).

 

[Garpal Gumnut]

The UK is stuffed.

I am on a sell on anything UK related.

They spend much of their time pissed, fighting or engaged in scams. Their men are portrayed as fat and lazy and their women are sluts

I don't associate with poms so cannot back this up with facts, but that is what I'm hearing.

They have a huge problem with immigrants they cannot assimilate and the ones they did 30 years ago have children who are hell bent on destroying the culture.

The ruling class are decadent and the lower class are serfs to drugs and handouts.

The UK is a sell++

Sell the Pound

gg

 

[theasxgorilla]

I remember years ago, the Indonesian rupiah crashed severely .

At the time, I thought the Wall Street boys must have finally agreed on their christmas vacation destination (Bali).

, LMAO, indeed...cynical yet appropo.

 

[Glen48]

They spend much of their time pissed, fighting or engaged in scams. Their men are portrayed as fat and lazy and their women are sluts
They are the geezers wot don't speak English proper, fight any other Country over football because they won War 11.
Lund den use to be the Capital now its about 3.00 Euro's

 

[theasxgorilla]

They spend much of their time pissed, fighting or engaged in scams. Their men are portrayed as fat and lazy and their women are sluts
They are the geezers wot don't speak English proper, fight any other Country over football because they won War 11.
Lund den use to be the Capital now its about 3.00 Euro's

I recognise that Glen, it was almost English.

Probably time to say enough is enough on the UK bashing front me thinks...particularly the dispersions being cast at the people. Besides, if you guys are right then it clearly has no correlation to exchange rates.