Dynamics Affecting The Value Of Monetary Exchange Rates - International And Foreign Currency Conversion
Money exchange rates are important to facilitate trade and commerce between countries. Foreign exchange conversion rates determine the value of one currency relative to another. Typically, exchange rates are expressed in terms of a base value. The US dollar is considered to be the world’s reserve currency and most currencies are benchmarked against this currency. International money exchange rates fluctuate on a daily basis in response to the market forces of supply and demand for that currency. Macroeconomic variables, political factors and central bank actions influence the actions of corporations, traders and governments who participate in world wide currency markets.
Why do exchange rates for foreign money vary at money exchange centers? Unlike some markets which have one centralized market, monetary exchange rates are traded in what is essentially an over the counter market. Currency participants negotiate with one another. A large percentage of trading takes place in the interbank market which involves large commercial banks quoting prices on the basis of bid/ask spreads. Currency brokers and money exchange vendors do not necessarily replicate these rates. They take the quoted prices they receive and may impose a spread between the price they offer you as a profit buffer. A good rule of thumb to abide by is to use major capital city banks to do all your currency transactions. They tend to offer more competitive rates. This becomes evident if you are traveling and have tried to use a remote money exchanger and been subject to very poor exchange rates.
International currency exchange rates fluctuate relative to one another on the basis of a number of political and economic variables. One of the biggest factors that can contribute to the monetary exchange rate is interest rate differentials. Currencies with higher interest rates attract capital inflow for investment. International speculators, corporations and hedge funds often borrow in low interest currencies and invest them for a higher return. Central banks alter interest rates periodically which can cause appreciation or depreciation of a currency. A recent example of this is the Federal Reserve in America lowering rates in response to the housing related crisis. The US exchange rate has been in decline the past few years and this latest monetary stance has contributed to its fall. Other macroeconomic variables such as employment numbers, economic growth, the current account deficit and political stability also influence the fundamentals of the country and impact the money exchange rate.
International agreements also shape the currency trading environment. In July 1944, the Bretton Woods agreement established an agreement whereby each country adopted the obligation to adopt a monetary policy to maintain the exchange rate of its currency with a fixed value in terms of the price of gold. From 1944 up until 1971, US dollars were convertible to gold by central banks to allow for the adjustment of trade imbalances between countries. The US ceased this convertibility in 1971. When the US dollar became the accepted currency for the payment of oil it cemented its status as the world’s reserve currency. The US dollar has enjoyed an artificially high demand for its currency due to the fact that oil is priced in US dollars. This may well change in the years to come with Iran opening an oil bourse denominated in non dollar currencies.
