Investors will exchange their currency for the higher-paying one. They then save it in that country's bank to receive the higher interest rate. Second, is the money supply that's created by the country's central bank. If the government prints too much currency, then there's too much of it chasing too few goods.
Currency holders will bid up the prices of goods and services. That creates inflation. If way too much money is printed, it causes hyperinflation. Hyperinflation usually only happens when a country must pay off war debts.
It's the most extreme type of inflation. Some cash holders will invest overseas where there isn't inflation, but they'll find that there isn't as much demand for their currency since there's so much of it. That's why inflation can push the value of a currency down.
Third, a country's economic growth and financial stability impact its currency exchange rates. If the country has a strong, growing economy, then investors will buy its goods and services. They'll need more of its currency to do so. If the financial stability looks bad, they will be less willing to invest in that country. They want to be sure they will get paid back if they hold government bonds in that currency. If you're traveling overseas to another country that uses a different currency, you must plan for exchange rate values.
When the U. If the U. Since the exchange rate varies, you might find the cost of your trip has changed since you started planning it. You can search online to find the exchange rate of the U. Google has a tool to help with this. It even shows a chart revealing whether the dollar is strengthening or weakening. If it's strengthening, you can wait until right before your trip to buy your currency.
Check to see if your credit card company charges conversion fees. If not, then using your credit card overseas will get you the cheapest exchange rate. If the dollar is weakening, you might want to buy the foreign currency now rather than waiting until you travel. Next lesson. Effect of changes in policies and economic conditions on the foreign exchange market.
Current timeTotal duration Google Classroom Facebook Twitter. Video transcript What I want to do in this video is to give you an intuitive sense of how a market for currencies would actually work. And it's very non-inuitive for a lot of people because we're going to be talking about currencies becoming more expensive or cheaper, or the price of a currency in terms of another one.
And what I want to do is give you a very intuitive feel for that. So let's say, just because this is a hot topic right now, let's just make the two currencies the Chinese renminbi and the U. And the unit of exchange in China is a little confusing because sometimes they use the word renminbi and sometimes the word yuan.
The yuan is the unit of the renminbi. So let's say right now, if I were to just go on some website-- and this is not the actual exchange rate right now, but let's say right now the quoted exchange rate is 10 yuan per U. And every time I say dollar in this video, I'm referring to the U. If I have 10 yuan, I want to convert it to dollars, someone's going to give me a dollar for it.
Now let's imagine a situation, and in the next few videos I'll construct actual trade imbalances where this would actually happen, but let's say we live in a reality where there are 1, yuan. So let's say someone has 1, yuan and wants to convert to dollars.
Let's say you have two other actors over here, and obviously these markets involve many, many, more than just the three people, but this will help us simplify, or at least understand how these exchange rates would work. Maybe he wants to buy some Chinese goods, maybe he's a Chinese factory owner who sold his goods in the U. So net, what's happening here? What's the total demand to convert yuan into dollars, and dollars into yuan? Let me write this down. And then, on the other side of that transaction, we have 1, yuan that needs to be converted into dollars.
So now we have 1, yuan. When people realize that their currency isn't worth as much as the pegged rate indicates, they may rush to exchange their money for other, more stable currencies.
This can lead to economic disaster, since the sudden flood of currency in world markets drives the exchange rate very low. So if a country doesn't take good care of their pegged rate, they may find themselves with worthless currency. In reality, few exchange rate systems are percent floating, or percent pegged. Countries using a pegged rate can avoid market panics and inflationary disasters by using a floating peg.
They peg their rate to the U. However, the government periodically reviews their peg, and makes minor adjustments to keep it in line with the true market value. Floating systems aren't really left to the mercy of market forces, either. Governments using floating exchange rates make changes to their national economic policy that can affect exchange rates, directly or indirectly. Tax cuts, changes to the national interest rate, and import tariffs can all change the value of a nation's currency, even though the value technically floats.
The next time you cross a border, and trade your money for that of another country, remember that economic forces across the world helped determine that exchange rate.
In fact, when you exchange currencies, you're one of those economic forces -- you're helping to set the exchange rate, too. On January 1, , the euro became the single currency of 12 member states of the European Union -- making it the second largest currency in the world the U. This was, to date, the largest currency event in the history of the world; sixteen national currencies have since completely disappeared and were replaced by the euro.
For even more information on the euro , check out How the Euro Works. The original seed for a common currency was planted in when Winston Churchill suggested the creation of the "United States of Europe. Although the euro is fundamentally a tool to enhance political solidarity, it also has the economic effect of unifying the economies of participating countries. Some of the euro's advantages, in regard to economics, include:. Sign up for our Newsletter!
Mobile Newsletter banner close. Mobile Newsletter chat close. Mobile Newsletter chat dots. Mobile Newsletter chat avatar. Mobile Newsletter chat subscribe. How Exchange Rates Work. These markets are a complex network of computers, rather than a physical market, allowing traders to buy and sell currencies 24 hours a day.
How does the Bank of England influence the exchange rate? Find out more What are interest rates? What does the Bank of England do?
You may also be interested in…. Back to top. Give your feedback. Yes, it was useful Yes. No, it wasn't useful No. Page Url. Is Mobile. IP Address. Operating System. What did you think of this page? Add your details Please prove that you're not a robot:. Accept recommended cookies.
0コメント