hi, i would like to know how is exchange rates for the currency determined and how was it initial defined.?

Answer 1

The floating exchange rates are determined by the supply and demand of the currency on the markets. They're influenced by many factors, including interest rates, future outlook of the economy, general strength, and so on.

The initial rate is determined by the government that issues the currency. The initial nominal value is pretty random since a country can revalue its currency if it wants. See what happened to the old Turkish Lira or the old Marks. They just said, we'll divide everything by a million or whatever the factor was and it happened. So, having the lowest number doesn't really mean anything.

Answer 2

Initially, the exchange rate is set by that country's government. Beyond that, it's generally determined by the financial markets. However, some countries like China deliberately keep their money's value at some artificial level. Why? To protect it and keep it's value either higher or lower than the market would.

But by and large, most currencies are market driven and values are determined on the foreign currency exchange markets. FYI, when you travel to foreign countries, stores often don't use the market rate, but rather an average daily rate. This way, they don't have to constantly readjust throughout the day.

This is why you can walk into BankAmerica and get one rate, walk into 7-11 and get another. But the "real" value fluctuates throughout the day on the financial markets.

Answer 3

The price for currency is determined the same way as the price for anything else -- by the market.

If someone sets the price too high, then too many people sell. If someone sets the price to low, then too low then too many people buy.

Prices on milk, eggs and stocks are all set this way, too.