In the past, specifically between the period from 1870 to 1914, there was a global fixed exchange rate for currencies, as currencies were linked to gold, which means that the value of the local currency was fixed at a specific exchange rate against an ounce of gold and with the beginning of World War I this standard was abandoned and the dollar remained The US is the only currency linked to gold and at a price of $35 an ounce. In 1944, countries became pegged to the US dollar. Countries continued to work with this standard until this system collapsed between 1968 and 1973 when the United States decided to separate the dollar’s link to gold, meaning that the dollar became a currency. Floating, and since that time, governments determine the prices of their currencies in two ways,
They are: either a fixed price, or a floating rate.
Fixed exchange rate or currency peg
In which the exchange rate of the currency is determined by the government and through its central bank, and the price is fixed on a fixed basis, by linking the currency of the country to the currency of another country such as the US dollar, the euro, the yen, or a basket of currencies, as some Arab Gulf countries do by linking the exchange rates of their currencies to the price of the US dollar In this case, the exchange rate is also floating, but it moves side by side with the foreign currency to which it is linked. To maintain the exchange rate, the central bank always follows the supply and demand process for its currency and also keeps large quantities of foreign currencies, and the bank may intervene by selling these currencies and buying its currency. To counter any purchase or sale of its currency and according to what increases or decreases supply and demand.
As for the general exchange rate,
It is determined by the global currency markets through supply and demand, so if the demand for the currency is high, the value of the currency will increase, but if the demand is low, this will lead to a decrease in the price of the currency
For example, if European demand for the US dollar increases, then the supply and demand relationship will lead to an increase in the price of the US dollar in relation to the euro. The floating exchange rate does not mean that countries are not trying to interfere with the price of their currency, as governments and central banks regularly try to keep the price of their currency suitable for international trade. There are a large number of factors that affect currency exchange rates, including interest rate changes, unemployment rates, inflation reports, gross domestic product numbers, manufacturing data, and the instability of a country's government makes its currency likely to depreciate in value compared to stable countries.
Finally, I hope you will benefit from this article
0 Comments