International currency exchange rates are a mechanism for determining the relative value of one currency against another. Rates are set by the forces of supply and demand. Market participants negotiate an agreed value at which the exchange takes place. There is no one centralized market place for exchange rates but the majority of transactions occur on the Interbank market between the participants who negotiate the agreed price. Exchange rates are essential for maintaining a workable framework for all matters of international trade and commerce. This article will examine the role of exchange rates and how they can influence economic and planning decisions.
Currency exchange rates affect foreign trade. International exchange rates allow countries to determine the relative cost of goods for sale. When one countries exchange rate rises or falls against another, it can create a shift in the way trade and commerce is conducted. Manufacturers and exporters price the cost of their goods in their base unit of currency. If the exchange rate appreciates to a considerable extent then it makes the cost of goods more expensive to the foreign purchaser. This can result in a reallocation of resources as demand for the goods shift to a comparatively cheaper supplier.
» Read more: International Currency Exchange Rates & Monetary Policy Considerations