Exchange Rates: All You Need to Know

Exchange rates concern currencies in the world and their performance in the global economy. It is one of the considerations a nation will consider when it comes to the development of monetary policies that help strengthen the economy of a nation.

In this article, you will learn information about the exchange rate, why they fluctuate, and their impact on the economy.

What is Exchange rate?

The term is not strange to business students and those inclined in the area of business. However, for those who do not understand what we mean by the exchange rate, I will try as much as possible to simplify the term so that you can understand it better. 

Exchange rate as the name suggests involves switching two things, in this case here the switching involves currency. One currency is exchanged for the other, at a particular rate and that rate is known as the exchange rate.

The rate is not constant and has a couple of factors that determine the figure per time. 

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Let’s say you have naira at hand, and you wish to get dollars, you need to know the exchange rate, for example, let’s assume that you have N5000 naira and the exchange rate is 1$ to N250.

If you exchange your nairas for dollars, what you will have in dollars is 20$. In essence, you will have to give out N250 for every 1$ you want. 

What is Exchange Rate Regime?

The exchange rate regime refers to the interplay of the government’s economic policies, situations, and the foreign exchange market in determining and managing the value of a currency over other currencies.

We have two types of exchange rate regimes, floating and fixed exchange rate regimes. 

Floating exchange rate regime 

The floating exchange rate regime is subjected to the international trade market which determines the rise or fall in the value of the currencies traded.

Fixed exchange rate regime

In this kind of exchange rate regime, there is a fixed-price currency against other currencies. The value of that currency is solely controlled by the Central Bank of the country and not by the International trade market.

How to determine if an exchange is the best

Whether you want to buy or sell currencies, you will need the bank or any certified financial service provider to carry out the exchange. Different banks have different rates which is the mid-market value to compensate for taking profits from you transacting them.

The mid-market value is the rate at which the banks and other financial providers will sell or buy currencies from their customers. The value is a bit short of the actual exchange rate. Now, this begs the question of how to find the best price. 

You can do this by comparing the exchange rates from several platforms by using the software. I will recommend you use the Wise app or website to help you get an overview of the various prices before you buy or sell. 

How is the exchange rate determined 

The explanation for this is very complex but the simplest explanation is the buying and selling of the currency. If one currency is in high demand, it is sure to have high value when you compare it with a currency with low demand. 

How to know the exchange rate today 

Yes, it is possible to know the exchange rate today. The process is as simple as taking your phone to google by searching for the exchange rate of the currencies you wish to check. You can also make use of the following websites highlighted below if you want to know the current prices of the various currencies.

• www.xe.com
• www.travelex.com
• www.oanda.com
• www.exchange-rates.org
• www.x-rates.com
• www.fx-rate.net
• www.iban.com
• www.fastforex.io
• www.wise.com

These websites have live coverage of the exchange rates for different countries and quite a large number of currencies to check from. Also, an online currency converter is available for quick output to know what you will get when you want to change from one currency to another.

What makes the exchange rate increase or decrease?

As stated earlier, the exchange rate is not constant, it fluctuates frequently either increasing or decreasing by a wide or low margin. Usually, in most exchange rates, one of the currencies is higher than the other.

The higher currency has more demand than the other. In this section, you will understand the reasons behind these fluctuations.

The following are the reasons why the exchange fluctuates:

Interest Rates

High-interest rates affect the rise and fall of exchange rates of currencies. It happens when a country decides to decrease the supply of its currency in circulation.

Global Crisis

Global crisis sparks a chain of buying behavior of people to buy and hold more of the currencies of countries not in crisis. Hence, such currency will have an increased price and if it is the other way around, the price will be reduced.

The demand and supply of the currency

If a currency is high in demand, there will be an increase in the price or value of that currency. Hence the exchange rate for such currency will be on the high side.

Inflation

Inflation plays a part in deciding the rise and fall of exchange rates of currencies.

Rise and fall scenarios of currencies in exchange rates have both adverse and beneficial effects on the economy of a country.

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How do exchange rates affect the economy? 

Exchange rates affect the economy in either a positive way or a negative depending on the economic situation and the value of the currency. 

The following are the ways exchange rates affect the economy

Inflation

A poorly managed currency can cause inflation of goods in the country. On the other hand, a strong currency will have a contrasting effect.

Imports and Exports

Importing goods and raw materials from abroad may be difficult if the country has poor performing currency and heavily depends on consumption rather than production. The prices of imported goods will be on the high side and worse when it is traded against a strong currency.

Final Notes On Exchange Rates

Exchange rates provide information on how a currency is performing in the global economy, it also talks more about the economy of the country that issues it.

Simply, it is the value at which such currency can be traded in comparison with other currencies. There is so much to learn from the post.

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