What determines the value of a currency as opposed to other currencies?

Question

What makes the dollar go up or down against the Euro or yen?

Why are currencies in China or India so low?

Answer 1

In order to trade with another country, you need their currency. Generally, you have to buy it, which is the exchange rate. So basically, money goes up and down in value against other currencies based upon supply and demand. If your country exports alot of goods, then demand for your currency will be high, and your currency will get stronger. If you print alot more currency, the supply will increase, making it easier to purchase it, and thus it will get weaker.

Currencies in China are so low because the exchange rate is not allowed to float. It is fixed, which has caused much controversy lately. India, while allowed to float, is greatly manipulated by the government in power, and thus their currency remains low.

Answer 2

This is VERY complicated - sorry! Basically, people with millions or hundreds of millions of (say) pounds in surplus cash want to invest that cash to get the highest return. They could be hedge funds, unit trusts, whoever.

They will generally only invest in sure currencies like the US Dollar, Sterling or Euros. That's because those currencies have low inflation and value will not erode.

Then, they look at the interest rates available in those currencies. If the US Dollar offers 4% and the Pound offers 5.25% then they'll be likely to get into the Pound. However ( I warned you that it was complicated) if Britain has 3.9% inflation and the US has 2.3% inflation, then a careful calculation needs to be made before buying the currency.

Just to add spice to all this, currency traders are buying and selling currencies all day long and are forcing rates up and down for purely speculative reasons which have little to do with investment (as such) but more to do with making a profit on an 'in and out' deal.

If a trader buys 100 million dollars (which they do all day long) at 1.9500 and, seconds later, they sell at 1.9475(a difference of a tiny quarter of a cent) they make £128,369 instantly! However, if the currency goes the other way, they lose a similar amount instantly!

Currencies such as the Chinese or Indian are regarded as worthless. There is very little reliable regulation of these currencies and inflation is often rampant, eroding value. Also, these countries limit flows of their currency in and out of the country. In Brazil, the national airline (owned by the government) will not accept their OWN currency, only US Dollars!

I hope this helps you to understand a bit more about currencies.

Answer 3

The value of a currency is based on faith. Since all currencies are fiat currencies, there is nothing of real value backing their value. A federal reserve note is actually a certificate of debt.

Faith in a currency is determined by faith in the stability of an economy, and neither India nor China is as stable as the economies of western countries.

Btw, the war in Iraq is more about Mideastern countries wanting to value their oil in Euros rather than dollars. Euros have recently been backed, to a small degree, by gold - (10%?). That means that the super rich would have an opportunity to convert their Euros into gold if the Euro showed signs of collaps.