The Importance Of Exchange Rates

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Exchange Rates
The exchange rate is “the price of a currency in terms of another, e.g. how many U.S. dollars can be bought for one pound sterling” (Rutherford 140). Exchange rate ensures the connection of the national currency with other currencies, as well as a comparison of macroeconomic indicators of different countries. Ultimately, the exchange rate determines the purchasing power of a particular currency. The exchange rate has a significant effect on the country's foreign trade since the competitiveness of the country’s products in global markets depends to a large extent on its level. The exchange rate is necessary for the exchange of currencies in the trade of products and services, the movement of capital and credit. It is also necessary
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International payment or exchange transactions assume an obligatory comparison of prices of state and foreign currencies since each product bought or sold costs a value expressed in money. That leads to the emergence of the exchange rate and the need to determine it. Thus, the exchange rate is the ratio between the monetary units of different countries, determined by their purchasing power and some other factors. The exchange rate is necessary for international currency, payment, credit and financial operations. Moreover, from another point of view, the exchange rate is not merely a ratio, it is a price of the currency in relation to other currencies, and thus this price defines the cost of all the foreign goods in the …show more content…
Many factors are influencing foreign currency exchange rates, and often the understanding of those factors is a complicated process. Exchange rates depend on the changes in capital markets, international trade balances, political events and government policies, and economic news around the world. These factors determine the demand and supply of the currency. For example, the higher the inflation rate is in the country compared to the inflation rates in other states, the lower the exchange rate of its currency, unless other factors counteract. The exchange rate can change due to the general increase in prices and subsequent drop in the purchasing power of the country's monetary unit as compared with other

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