eli5: How are currency exchange rates set?
In: Economics
Usually, these rates are not “set”. Although a few countries try to regulate the rates of their currencies one way or another.
But in general, a currency is just one more thing whose value is determined by supply and demand. If more people want to buy dollars, the dollar will rise in value.
This supply and demand for currencies mostly comes from international trade: If a factory in Germany produces cars that get shipped to the USA and are bought there, then the customer pays in dollars, but the workers want to be paid in euros. Which means that the company needs to buy lots of euros with its dollars. So there is a demand for euros, and the euro’s exchange rate will rise.
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