Forex Exchange Rates
The need for normalization of the currencies of different countries arises due to the fact that goods are produced in one country but consumed or bought in another or many other countries. And thus a proper FOREX management is necessary.
Exchange rate is the value of the currency of one country in terms of the currency of another. For example when we say the exchange rate for USD to INR is 45.56; we mean that one USD is equivalent to 45.56 INR. This exchange rate is determined based on the financial growth or slumber of financial markets of the countries. To put it plainly the exchange rates depends on the demand of the particular currency in international market. For a currency that is very high in demand internationally, naturally the exchange rates with a currency not that in demand, will be sufficiently high. For example one USD is equivalent to approximately 92 Yen (Currency of Japan) which clearly indicates that worldwide USD is preferred to Yen and that explains such high conversion rates.
Great deal of small and big time investors have flocked up to invest funds in the foreign exchange markets as with proper judgment and professional help (if available) a lot of money can be made by them. Since the FOREX exchange rates fluctuate so much, very wise decisions have to be made while investing. For wise decisions to be made, one must also keep track of the GDP of individual countries as such GDP’s too play a major role in the determination of the foreign currency exchange rates. For a country whose currency is very high in demand, the conversion rates are bound to be on higher side.
Now there are different kinds of exchange rates. For instance there is a free exchange rate and a pegged or better known as fixed rate for exchange. In free exchange rates the GDP and financial performance of the country and the demand for that country’s currency play a role in determination of exchange rates. While in fixed rates for exchange what we have is the facility for a country to peg its exchange rates with the currency of another country for a fixed period of time. China, many European countries have constantly been doing this with the USD. This is beneficial compared to the free rate as the rates aren’t going to change even with very good or bad performance in economy of either country.