Explain how exchange rates are formed in the market.it is to do with economics

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pohnpei397 eNotes educator| Certified Educator

Exchange rates are formed by supply and demand, just like the prices of most other commodities.  The more demand there is for a given currency, the higher its exchange rate will be.

Typically, demand for a currency will occur for one of two reasons.  First, people from other countries may want to buy goods from a given country.  They have to buy that country's money in order to buy its goods.

Second, people fror foreign countries may want to invest in another country -- buy its stocks and bonds, for example.  In this case too, they must buy that country's currency so they can use it to invest in the things they want.