I understand that for currencies that are not fixed to each other, their exchange rate reflects the supply and demand, or exports and imports, that the two currencies are involved in.
I want to know who, what machine, what algorithm ultimately adjusts the exchange rate I see on google if I do a “1 usd to jpy” search.
Is there an international organization out there that collects all the data involving two currencies, and automatically runs an algorithm that calculates the rate and informs of the current rate to everyone else?
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No one person sets the price. It emerges through the actions of many buyers and sellers. Let’s suppose I run a bank and have extra yen and want to buy dollars. I offer to pay 139 yen per dollar. Other people and banks are less desperate to get rid of their yen: one offers 138, one offers 137 yen per dollar. Other folks are looking to sell dollars: they want 141, 140, and 139 yen.
I can do a deal with that last guy. I buy up his dollars, and now the low offer is 140. If I want more I’ll have to pay 140 for them. The new price is 140.
Now you come along with tons of dollars to sell. You sell me all I want at 139 yen. If you want to sell more, you’ll have to sell to the next guy who’s offering 138. The new price is 138.
At every moment, the price is set by the most generous offer that nobody is yet willing to meet.
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