Tuesday, August 9, 2011

International Exchange Rates Change When Values of Currencies Change

International exchange rates are rates between two currencies that are traded on the decentralized over the counter market called foreign exchange market. Hence, currency rates make the two currencies of the nation nothing short of any commodity which has its own rate. Currency exchange rates need to be known by those who have to undergo a monetary transaction out of one's own country. And, it is precisely the reason why it is called international exchange rates.

When currency exchange rates are based on market, they tend to change whenever the values of currencies involved in it change. The currency becomes more valuable when the demand to buy it is higher. This market changes are completely dependent upon the demand and supply rule. If there is lesser demand to buy that currency in question, its value in the foreign exchange market will get decreased. Now, let us explore what are the factors that may contribute in deciding either the increase or the decrease in demand and supply of the currency rates.

When one of the currencies involved in international exchange rates gets more value it is because its demand is higher. And its demand is higher because in that specific country, there is an increased transaction demand for money or an increased speculative demand for money. The transaction demand for money has direct connection to country's business activity. The more the business activity, the higher gross domestic product and employment levels. The more the unemployment, the less the spending activity on goods and services. Hence, it is very simple to understand this rule of demand and supply in order to understand international exchange rates. When there is an imbalance in this demand and supply, Central banks often adjust the available money supply to absorb the changes that are happening in the demand for money due to business transactions.

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