How is the exchange rate (for say 1 US $) on any particular day is decided?

Question

i will like to know the process detail? Like how they calculate which tool do they use? etc.

Answer 1

Firstly, i think it depends on the FX policy which the country undertakes. From my understanding, there are policies like fixed, flexible or floating exchange rate. Fixed exchange rate regime would not allow the market's demand and supply forces to determine the exchange rate as the country will use it foreign reserve to maintain the fixed rate.

For countries using the flexible exchange regime, it is the opposite of the fixed exchange regime. Under the flexible system, demand and supply would determine the FX rate.

Floating regime means that the exchange rate is allowed to flactuate within a region, set by the authorities unknown to outside parties, if exchange rate remains within the band, there will be no interception, and intervention when the FX rate falls outside the band.

Answer 2

It's not "decided". It's determined by supply and demand, a lot like stock prices.

There are large banks (about 300 worldwide) that work as foreign exchange dealers. At any given time during normal market hours (which in many cases span 24 hours a day), dealers stand ready to give you a blind (i.e., including both bid and ask price) quote. Typically, dealers maintain an inevntory of currencies. If a dealer see a lot of interest in buying a certain currency, it moves its price up (otherwise, it will run out of inventory); if it sees a lot of interest in selling a currency, it moves its price down (otherwise, it will end up with bigger-than-desired inventory).

Answer 3

There is no process. It is simply a matter of supply and demand. If Singapore has to pay for 60 747 jets and needs to convert their currency into 30 billion dollars to pay the bill, the demand for dollars goes up. If too many people are trying to buy dollars at once they will drive up the price.

Also when interest rates are high in England, German banks will buy billions of pounds to take advantage of the earnings. Demand for the pound will drive the price up, and at the same time drive the Euro down.