InvestorQ : What exactly do we understand by exchange rates?
Priyanka Jain made post

What exactly do we understand by exchange rates?

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Ria Roy answered.
2 years ago


When we send our children abroad to study or when we go on official work or holiday, we are required to deal in currencies. Of course, most of deal in the hard currencies like dollar, pound, Euro or the Yen. We are all familiar with the concept of exchange rates and how they are used to exchange currencies of different countries. But, how exactly does the value of the currency get decided? On what basis does the market decide that the value of the Dollar will be equivalent to Rs.64/$ or the value of the Euro will be equivalent to Rs.70/$. Of course, since the exchange rate is a tradable commodity and hence it will get determined by the forces of demand and supply. But currency is not just like any commodity as the health of the economy is the underlying asset. A strong currency normally co-exists with a strong economy and vice versa. When it comes to the INR; a variety of factors like hedging demand, speculative demand, macro factors, FII flows all matter and have an impact on the exchange rate.