Exchange rate: What should be oriented

What is the exchange rate and who determines it?

The exchange rate is simply the price of currency A expressed in the price of currency B. Thanks to the exchange rate offered by an exchange, you know how much currency you can buy for a certain amount of money expressed in another currency. Very important concepts that should be known by persons interested in the topic of the exchange rate are: the base currency and the quoted currency.

The first is a currency that is a benchmark for the exchange rate and for the prices of other currencies. The base currencies are those that have a strong position in the financial market, that is, the euro, the US dollar, the Swiss franc, the British pound, and the Japanese yen.

The primary currency, as you can easily guess, is used to evaluate the base currency. It is quoted currencies that are most vulnerable to large exchange rate fluctuations because they are more difficult to sell on the market and do not yet have such international importance. The quoted currency is, of course, hryvnia, Polish zloty, or Indonesian rupiah. 

Currency quotation

Quotation of currencies, that is, the ratio of the price of the base currency to the quoted one, is the clearest way of presenting the current value of the exchange rate. Currencies are combined in pairs to explain the exchange rate in the USA or Canada to buyers. For example, USD/UAH – the ratio of the US dollar to the Ukrainian hryvnia. Of course, on the left side is the base currency, and on the right is the primary currency. At the same time, it is worth noting that the correct course is always indicated in the fourth decimal place.

Remember that the quote is not mandatory. This means that in practice it is impossible to buy currency at the exchange rate published on various financial websites or, for example, on the website of the NBU. The final price depends on the terms of the contract between the parties to the transaction, that is, for example, between the client and the currency exchange office, the bank and your bank, or the investor and the dealer in the foreign exchange market.

How the exchange rate is formed?

The exchange rate is formed in the foreign exchange market, where the demand and supply of currency meet. If the demand for the currency exceeds its supply, it can lead to an increase in the exchange rate. On the contrary, if the supply of the currency exceeds the demand, its exchange rate decreases.

Factors on which currency exchange depends:

• A wide variety of factors can affect the exchange rate, including:
• political situation in the country;
• economic situation; inflation rate;
• the level of interest rates; volumes of trade between countries.

Who is selling?

Basically, these are exporters. They sell goods abroad and bring money to their country – they have businesses, taxes, etc. here. It is impossible to pay for all this in dollars, so exporters need to buy local currency. In addition, foreign investors who have dollars in their hands, which they need to exchange for local currency, enter a certain country.

Who is buying?

First of all – importers. They sell goods in the target country and receive its local currency. In order to buy goods abroad, they need to have dollars or euros. That’s why they buy them – they are from the demand side. Secondly, these are citizens and foreign investors who want to withdraw money abroad. They mainly carry out transactions on bank accounts or pay with cards, and as you know, Visa cards are accepted in 150 countries.

There is also the local national bank, which buys currency. The national bank constantly intervenes by buying and selling foreign currency. In this way, it smooths out the jumps. Or he can buy currency to replenish his gold and foreign reserves.

Depending on what happens to each of these players in the foreign exchange market, there are certain movements in the exchange rate.

How does the exchange rate change our lives?

Exchange rates can affect our lives in many ways.

• If the exchange rate declines, the prices of the things we import will rise. At the same time, our exports will be more accessible to overseas purchasers. The country’s trade balance and inflation rate would suffer as a result.
• The cost of travel is also affected by the currency rate. If the currency rate moves in one direction or the other, travel to foreign countries will become more expensive or less expensive.
• Exchange rates have an influence on investments as well. After all, the profit or loss of investors is closely related to currency movements.
• Exchange rate dynamics are crucial for businesses to understand because they may impact the cost of resources used in production as well as the cost of items sold or imported.
• The currency rate is especially crucial for people who live or work overseas. These individuals must be aware of which currencies are acceptable in a given country as well as the current exchange rate. This will enable for effective spending and financial transaction planning.

The exchange rate is an essential economic feature that everyone should be aware of. It has an effect on many facets of our lives. Monitoring the currency rate and understanding its movements may therefore aid in making sound financial decisions and budgeting costs.

Where is it cheaper to exchange currency?

Monitoring current exchange rates is important not only for financiers and speculators but also for entrepreneurs trading with foreign markets, holders of foreign currency loans, as well as people who go on vacation to another country. You can find a favorable exchange rate on Rates. Although the foreign exchange market is considered quite predictable and stable, this does not change the fact that sometimes it “storms”. Therefore, it is necessary to know where currency rates actually come from, who manages them, and what the current value of this currency depends on.

Conclusion

We would like to emphasize that knowledge of the local financial market can play a strategic role in the formation of savings, business budgets, or simply family expenses. And thanks to our advice and Rates, you can always be aware of what is happening in your foreign exchange market.