How do exchange rates work?

Discussion in 'Economics' started by leilanikiri, Apr 3, 2011.

  1. If there is an increase in the exchange rate of the u.s. dollar, what happens to imports and exports to other countries?

    Can someone explain?
  2. tommo


    To be honest this topic is a huge and cant really be covered on an internet forum.

    But a few pointers. INTEREST RATES can be raised or lowered and can have an impact on currency prices.
    EXCHANGE RATES fluctuate on a second by second basis depending on supply and demand. There is no way of saying for certain whether demand will rise or fall, it is based purely on the psychology of the market.

    Exchange rates are therefore not "raised" which would imply some governing body sets them. (although this does happen in certain economies, but generally not in the west).

    In your example you talk about the USD. If the price of USD goes up relative to another currency, for example the EUR, the USD will be able to buy more euros. A German product that may have cost you the equivilent of $1000 yesterday, may cost you $950 today.

    So assume you are a German selling to an American. You are going to get more demand for you product as the American customer can start to afford more of your products (because his currency is getting stronger).

    So to put this in terms of your question German exports can be expected to increase as the USD rises.
  3. If dollar rate increases, exporters to US will profit.
  4. further to tommo's succinct explanation

    after the euro fell below 1.19 the German 'boom' took off; since then the euro has
    risen to 1.42 , inflation has raised its head, well at least its snout, and the Germans
    want an interest rate increase, too bad for the PIIGS; find out this Thursday when
    the ECB are expected to raise the rate from 1% to 1.25%

    one economic guage of exchange rates/currency values of countries is the PPP -
    Purchasing Power Parity:

    another guage is the Big Mac Index - yes, price of Mc Donald's Big Mac hamburger