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How do Exchange Rates Work

The need for a money converter calculator stems from the fact that different countries in the world use different types of money with which they trade goods and services. For example, in Mexico they use the Mexican Peso, while in the US the American Dollar is used.

Therefore, if I own Mexican Pesos and plan to visit the US then I need to exchange my Mexican Pesos for US Dollars. If you try to use your Mexican Pesos in a shop in Chicago, US then they will reject your money. This is where using a money converter calculator will help you know how much of the new currency you will receive. However, have you ever wondered what factors effect the exchange rate between two currencies?

Factors that influence the Exchange Rate

There are two main systems that are used to control the exchange rate between two currencies and both are often used either directly or indirectly with most rates. The first is a pegged currency system. Essentially, the exchange rate of a pegged currency is fundamentally controlled by the Government of that country who will calculate its value and exchange rate compared to other major currencies. The exchange rate may not vary on a day-to-day basis but will be monitored regularly to make sure it is in line with market sentiment towards that currency.

The second is a floating currency system. The exchange rate of a floating currency is mainly determined by the markets. However, Governments will still manipulate these rates by controlling interest rates, tax rates and import or export tariffs. The following factors (among others) will effect the exchange rate you see when using the money converter calculator:

1. Interest Rates

The interest rate will determine how profitable it is to save money in the given currency. Therefore, a rising interest rate relative to other currencies will often lead to investors opting towards the higher level of interest they can achieve by holding their money in a certain currency. The heightened demand for this currency can then push its value up and hence effect the exchange rate you will see using our money converter calculator.

2. Inflation

A currency can strengthen when its inflation is lower in comparison to another currency. This is because the countries goods and services are increasing in price more slowly relative to the goods and services of the other country. Therefore, local citizens are less likely to import goods or services. Furthermore, the countries exports will strengthen bringing more money into that country. This tends to lead to a strengthening of the currency and a change in the exchange rate you will get through the money converter calculator.

3. Duty Tariff Rate & Competitiveness

If the local Government changes import and export tariff rates then this can effect how competitive the country is compared to other countries. If the attractiveness of a country’s goods increases then this will tend to lead to a strengthening of the exchange rate you will see with the money converter calculator for that currency.

4. Speculation

If a significant proportion of the financial community believes that the future looks glum for a given currency then this sentiment will often lead to traders selling the currency, which in turn pushes the price of the currency further down. The counter effect is also true when analysts predict a bright future for a given currency.

† NOTE: Use the money converter calculator to find the exchange rate between two currencies. Do not use this money converter calculator for trading the markets or Forex markets or when dealing with large quantities of money. If you need an accurate, up to the minute rate then please visit www.xe.com.

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