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

Expert Answers

An illustration of the letter 'A' in a speech bubbles

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.

Approved by eNotes Editorial Team
Soaring plane image

We’ll help your grades soar

Start your 48-hour free trial and unlock all the summaries, Q&A, and analyses you need to get better grades now.

  • 30,000+ book summaries
  • 20% study tools discount
  • Ad-free content
  • PDF downloads
  • 300,000+ answers
  • 5-star customer support
Start your 48-Hour Free Trial