Where International Exchange Rates Come From

The international currency exchange rates show the units to be exchanged from one currency to another.

It is essential to note that prices of currencies can float, which means that they can change continuously but based on a lot of factors. Additionally, currency rates can be fixed to another currency.

However, knowing the exchange rates of a currency concerning other currencies assist investors or traders in knowing an asset priced by foreign dollars.

For instance, an investor from the United States of America knows the value of the dollar to the euro exchange rate when choosing European investments. A decrease in the value of the USD may boost the value of foreign investments.

However, exchange rates come from different places, as the forex market is highly decentralized. In this article, we will take a detailed look at where international exchange rates come from.

• Interbank and participants

The interbank market comprises of the spot, forward, and the SWIFT (Society for Worldwide Interbank Telecommunication) market.  However, market participants include commercial banks, hedge funds, big-trading companies, and other financial institutions.

The interbank market performs trade between themselves or even exchange currencies.

The market participant, such as the commercial banks also trades foreign currencies daily. The interbank market is producing the best exchange rates, so too are forex trades.

• Macro Factors

Some macro factors also dictate exchange rates in the forex market. Macro factors such as the ‘Law of One Price’ impose that in the forex market, that the price of goods in one country should equal the price of the same goods in another country.

Furthermore, if the prices of products slop, the interest rates in an economy will increase. Hence, interest rates and the related prices affect and influence exchange rates.

Furthermore, geopolitical risks also have a big say on any economy. If there is economic unrest in any country, there will be a decrease in its currency and thus affect the exchange rates.

• Floating Exchange Rates

Exchange rates are also gotten from a floating rate or a fixed rate. It is essential also to note that the open market regulates floating rates through demand and supply.

However, if there is a high demand for a particular currency, then the value of that particular currency will rise. If the currency is low in demand, then its worth will decrease.

Additionally, other factors determine the floating rates, such as fundamental and technical analysis.

These analyses affect or influence the prices of foreign exchanges in the forex market. Fundamental and technical reports also control what investors perceive as a fair exchange rate.

Final words

Most countries may use the interbank market or fixed exchange rate to maintain the rate of exchanges, and it will not work after the intraday market.

Hence, most economies make use of both the interbank market and fixed exchange rate to stabilize their economy and maintain its currency value. To also preserve its currency market, an economy also holds vast reserves of its currency to control demand and supply.