Who decides the value of a dollar relative to a euro? Why do exchange rates change frequently?
In: Economics
Alright, imagine you have two kinds of toys: one toy is called “Dollar” and the other toy is called “Euro.” Sometimes, one toy becomes more popular and wanted by more people, like when everyone wants the Euro toy. When that happens, the Euro becomes more valuable compared to the Dollar. But if more people want the Dollar toy, the Dollar becomes more valuable.
The people who decide how valuable each toy is are called “traders,” and they trade these toys all around the world. The value changes because the traders are always buying and selling them. The value also changes if countries have a lot of these toys or if their economy (which is how much money and things they make) gets stronger or weaker. That’s why one day you might need more Dollars to get one Euro, and the next day, you might need fewer Dollars.
It’s like a game of trading toys, and the rules are always changing!
Casually, by accident, based on what people need at the time they make the deal. Only when people surveil the average of transactions, track it, publish it, and then banks use that to determine their deals do we get what we know as a formal exchange rate.
No different than knowing an apple is worth 2 granola bars in the school cafeteria.
Supply and Demand, same way any other price is determined. When lots of people try to buy one currency and few people are trying to sell it, the people who are selling raise the price because they can, and people still buy it. When lots of people try to sell one currency and few people are trying to buy it, the sellers lower the price to entice the few buyers to choose them instead of someone else.
Everything is worth what it’s purchaser will pay for.
The Dollar to Euro exchange rate is set by the fact that people are willing to exchange certain amounts of Dollars for certain amounts of Euros.
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