Lesson 4: Foreign exchange rates cont'd

Addendum:
In our modern world, our banks go to the forex market on our behalf. When a European inputs his credit card information on a US dealership's website to buy the Cadillac, the website tells the European's bank that it wants $100,000 dollars, and so the European bank goes to the forex market (which is also electronic), gets 100,000 dollars (at the prevailing exchange rate) by paying Euros, and transfers the money to the dealership's bank. The euro amount your bank had to pay in the forex market is the amount debited from your euro account.

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Education

Tags:

• Foreign
• exchange
• rates

[theozone2005]

In my rush i think Im a little off too, but my point is that Supply and quality are determining factors of historically higher value of currency in economies. Inflation is caused by manipulation of money supply.

[nadzTube]

@theozone2005 I agree that demand for foreign products is another factor explaining the change in foreign exchange rate. I did not talk about it here. Thanks for the contribution.

[theozone2005]

And if all price stays constant, then the demand for US dollars is really based on the quality of US products relative to the quality of European products. Whoever makes the superior products is the country whose currency value goes up.

[theozone2005]

If the price of cadillac decreased to $80,000, due to increased production, efficiency and supply of cadillacs, THEN the demand for cadillac would increase everywhere, and THATS what increases the demand for US dollars, and the value of the US dollar, because more Europeans would now want to buy more cadillacs from before. For example, Instead of European demand for cadillacs being 3 cadillacs for $300,00, it may now be 5 at $80,000. 3x$100K= $300K 5x$80K =$400K.

[theozone2005]

Your a little off. The demand for US dollars goes up more because of the increase in demand for US products...not because of increase in prices of US products. Increases in price of US products would cause a DECREASE in demand for US products which would offset the increase in demand for US dollars due to higher price. Its the increase in supply of better, superior, more desirable AND CHEAPER products (relative to whats available in Europe), that increases the value of US $ in US and World.