What controls the currency exchange rate?

Question

What makes the worth of the US Dollar fluctuate?

Answer 1

the world economy.
lets say if there's an expectation of the upcoming purchase power among US resident grows, that would simply means an increase of import demand in US. thus the value of US dollar would increase...
Other factor which affect the exchange rate can also be politic issue.....
hope this help!

Answer 2

Most major world currencies free float. That means the rate is set by the market. The currency market is by far the largest market in the world, dwarfing even the New York Stock Exchange. The value of currencies traded on any given day is approximately $1.5 trillion.

There are many participants in the currency markets. Some of the major players are banks, insurance companies, hedge funds, and multinational corporations. Anyone is allowed to participate.

Be warned the currency market does not have safeguards like the stock market, It is more geared for professionals.

Also, unlike the stock market, currency markets never really close. When trading winds up in NY in the late afternoon, Auckland, NZ, and SIngapore take over until Tokyo opens. London opens before Tokyo closes, and then New York opens again before London closes, and the cycle begins anew.

There are many things that affect the value of currencies. One of the largest considerations is the interest rate. Different countries have different interest rates. Right now, US rates are high compared to Europe and Japan. This makes holding the Euro or the Yen expensive in terms of US Dollars, and is one of the main reasons the dollar isn't lower than it is.

There are many other factors to consider in currencies: Trade deficits/surpluses, government budget deficits/surpluses, and overall consumer debt levels in each individual country. These things work to expand or contract the supply of that currency.

Central banks do, from time to time, operate in the market in an attempt to change the value of a currency. The Bank of Japan has been very active in this regard over the last 20 years or so, actually flooding the market with Yen in an attempt to keep it from rising too far. They've already cut interest rates as low as they can go, so they have no choice but too add to supply directly.

Importers and exporters are greatly affected by currency fluctuations, as you can imagine.

Answer 3

Supply and Demand of currency both have an impact.

For most open economies, the balance of trade directly affects their economies (due to currency supplied).

If a nation is running a trade deficit, their currency typically will depreciate. This makes imports more expensive domestically and exports cheaper abroad, which will reverse the trade deficit. The opposite typically occurs when a trade surplus is happening.

Demand for a currency (investment opportunities in the host country) also has an affect on the currency. You need dollars to buy a building or a bond in the United States, just as you need Yen to buy a building in Toyko.

The US runs a large trade deficit (especially with Germany & Japan for automobiles, China for steel/chemicals/etc). However, due to the strength of the US economy, foreign countries either hold these dollars to keep their currency weak (so that they can continue to import to the United States) or they re-invest the money in the United States.

Canada's currency has appreciated vs the dollar over the past ~3 years or so due to increasing oil prices, as that is one of Canada's biggest exports to the United States.

Answer 4

Basically it comes down to supply and demand. The Fed controls supply by raising and lowering the interest rate so that it costs more or less to get money.

When the value of the dollar is high, it makes it easier for us to buy tv sets and stereos and cars from Japan but less people from other countries will want to buy our stuff. If less people buy our stuff then we lose manufacturing jobs.

Answer 5

it Depend on many factors:
- the trade of a country either goods & services
- the Interest rate
- Investment & savings
- money supply and Demand
- the demand on the currency itself
- also exogenous factors as climate- politics.....etc

Answer 6

World economy

Answer 7

Disparity of interest rates, inflation rates, yield curve slopes, and asset prices between the U.S. and other countries.

Answer 8

Aggregate demand for dollars, versus supply of dollars, sets the exchange rate.

People who want to buy American goods or services ususally need to pay for these in dollars; this creates demand for dollars. Some of the stuff people (including foreign individuals and organizations) want to buy is American debt instruments, for example government and corporate bonds. These must be paid for in dollars, so this is an additional source of demand for US money. People want to loan money to American gov't and private borrowers (i.e. buy US gov't and corporate bonds) because they think the combination of the interest they will earn and the low risk of not getting their money back makes buying the bonds attractive.

Supply of US money is controlled by the Federal Reserve, through its influence on interest rates and on the terms under which American banks must loan money. If the Fed allows banks to both borrow and lend money on easier terms, this increases the effective supply of money.

One of the most important rules the Fed sets is the 'reserve' requirement, which is the amount of money a bank must hold in cash from its depositor's deposits. When you deposit money into a bank account, the bank doesn't just hold the money for you in a vault. It loans most (but not all) of it out to borrowers, and earns interest on this loaned money.

The bank can't loan all of its depositor's money out to borrowers, since it needs to keep some in reserve in case the depositors want to make withdrawals. The fraction of the money it has on deposit, that it can't loan out, is the reserve requirement. The smaller the reserve requirement, the more money the bank can lend to borrowers, and the more money it can earn in interest.

When a bank loans money, it 'creates' money, since now both the depositor and the borrower have the money to spend. If the Fed raises the reserve requirement, the banks can't loan out as much money relative to the money they have on deposit, and so the overall amount of money shrinks. If the Fed lowers the reserve requirement, the amount of money increases. It's a time vs money thing.

The Federal Reserve also set the interest rate at which banks can borrow money from it for short periods of time; this is the 'prime rate'. If this rate is lowered, banks can borrow more money from the Fed while paying less interest, which allows banks to borrow more money, which in turn increases the supply of money. The Fed also sets other rates and rules, such as margin requirements for stock buying on borrowed money, which affect the overall amount of money in circulation.

The reason why the Federal Reserve Bank is set up to loan money to banks for short periods of time, is to prevent banks from literally running out of money to pay their depositors if for some reason a whole lot of depositors at a particular bank go in to withdraw their money at the same time. This can happen, because as explained earlier, banks loan out their depositor's money, so most of it is not available to be withdrawn on short notice. As its name implies, the Federal Reserve Bank is a reserve of emergency money available to banks in case some event causes many depositors to demand their money, which is called a 'run' on a bank.

It't the combination of supply and demand that sets the value of the dollar, just like any other thing which can be traded.

Answer 9

Reserve bank