What factors affect international money exchange rates?

Question

i'm sure a lot of factors, for example how well the economy is doing, employment rate, etc. it is still baffling to me, however, because the uk sterling is worth so much more than the us dollar...almost double. on a very general level, i dont think englands economy is doing that much better than the u.s. economy, am i wrong? certainly not double in whatever formula has been contrived. someone help me out.

Answer 1

You are talking apples and oranges. Take the Japanese Yen as a better example. The US dollar is worth 120 yen. Is the US economy 120 times better than Japan's economy? Probably not, but what does that sound like? It sounds to me that the Japanese base currency is something more like a penny not a dollar. That the UK pound is more of a $2 bill not a dollar. What you have to be looking at and measuring in exchange rates and comparing economies is the change in rates, and if that rate is getting bigger.

Countries decide what their currency is worth, and it can be national pride that sets it. The old peg rate, had each currency at a set rate. Most use a floating rate now, but still they started at a peg rate all those years ago, and each nation is able to have some influence on what their currency does. They can increase the interest rate to attract foreign money into the economy. Or buyback their currency maybe selling gold reserves to do it. Or printing more or less currency. None of these is a measure of the economy, but changes the value of your dolor.

And speculation is a big part of exchanges. It isn't always how well your economy is. It is what the world THINKS your economy is going to do. That's why things like employment rate and debt load effect the exchange rate. If foreigner have money invested in your country, and unemployment surges, or your debt-load is doubling, they can panic and pull their investments out. Or if they think things are not so great now, but will be better next year, it might be a better time to buy in now expecting you currency to rise when they want to take their money back out next year.

Answer 2

I do believe the british economy is doing muc better especially in relation to debt. As you know the US is the biggest debtor in the world and because of that it is one of the factor i believe that is affect the exchange rate. also since the US is under a floating exchange rate regime, investment and interest rates are affecting the the exchange rate

Answer 3

My predecessor is right about apples and oranges, the important thing is what you can buy with the amount of currency you get, and the wages and prices in the UK, Japan and the US, once converted into the same currency, are what matter.

I tried to explain how exchange rates were determined in a former question, that might help you:

http://answers.yahoo.com/question/index;_ylt=An9zZBW6W61T1GsXcfqbOrzty6IX?qid=20060917165008AA0FbKe&show=7#profile-info-98d97c843a8be129e16fd755f227a68baa