The Importance Of Exchange Rate

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The exchange rate is the price of a nation’s currency in terms of another’s currency. Thus, an exchange rate has two components, the domestic currency and a foreign currency, and can also be quoted either directly or indirectly. Basically the exchange rate allows you to determine how much of one currency you can exchange for another. So, one pound may be worth $1.50 and 1.33 euros. Currencies change in value against each other frequently, this is because most currencies are based on flexible exchange rates. Currencies change in value because there is a change in demand for holding that specific currency. Not only is there a flow of goods and services between countries, there is also a flow of funds. The flow of U.S.D. in and out of the United States determines the value of the U.S.D. relative to the currencies of other nations, such as the Japanese Yen or the British pound. Even though most people purchase everything in dollars, the exchange rate is important because it determines the price of the imported goods they buy that is relative to domestic goods. The exchange rate also determines the price of U.S. goods overseas, relative to the goods produced in those countries. …show more content…
dollar where to depreciate against the Japanese Yen, it would affect services and goods, as well as imports and exports. When the U.S. dollars depreciates then it causes imports to increase in price. As well as causing all U.S. exports to diminish in value. If the USD were to depreciate in value against the Yen, then the Yen must appreciate against the USD. The exchange rate causes countries to either gain or lose, the Japanese would be happy that the Yen is appreciating, yet the U.S. would not be happy. The exchange rate is in fact a price, and in most cases it is determined in a market by demand and

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