Foreign Currency Rates Depend upon Currency Rate of the Nations

Foreign currency rates are dependent on currency exchange rate. A currency exchange rate is a rate at which currency of one country is exchanged for the currency of another country. Therefore, it is like any other asset or commodity which you buy at certain price. Price of a currency can be decided by two ways: a fixed and floating rate. A fixed or a pegged rate is the rate that is decided by the government or the central bank. These rates are official exchange rates and are often decided against major currencies such as the U.S. dollar, the euro or the yen. The government always tries to maintain the local exchange rate by buying and selling its own currency in the foreign exchange market to maintain foreign currency rates. And, it is due to this requirement to maintain the rate; the central bank of any country needs to maintain high level of foreign reserves. The central bank uses this reserved amount to release or absorb the extra funds into or out of the market. These official currency exchange rates can be adjusted if and when necessary.

Another factor on which foreign currency rates are based is floating exchange rates. As the name suggests, floating rates will change now and then. These rates are decided by private market through the law of supply and demand. These rates are also termed as self-correction because the moment supply and demand changes, these rates get changed. For example, if the currency of your country is not in demand in foreign exchange market, then, it is natural that nobody wants to buy it. This will automatically decrease its price. Having said this, essentially, the nature of all currency exchange rate is fluctuating. The reason is currency rates are exposed to various factors that keep on changing. Read more..