Say that my country with a currency called “X” has an exchange rate of X10/$1 so 10 X = 1 dollar but a burger in the US is equal to $1 while the same burger in my country is equal to 10 X then why does an exchange rate matter if we can still get the equivalent items just in our own currencies?
In: 7
Because if the rate changes you only get $0.90 for your 10 X, so you spend the same amount, and get less back.
Exchange rates change. If tomorrow the exchange rate is 7x = $1 but a burger in your country is still 10x then a burger in dollars is more expensive to you.
The exchange rate matters because it’s just that — an *exchange rate.*
Let’s say I’m from the US, and I’m visiting your country that uses your X currency. If I want to buy stuff, I’ll need X, not US Dollars. I need a way to convert my USD to X, and the exchange rate is what determines how much X I get for my USD.
It’s the same thing going the other way — when I convert X back into USD, the exchange rate determines how much I get.
There’s a *ton* of reasons why exchange rates are important, and maybe someone else can explain in more detail, but I’ll stick with a basic example.
Let’s say I convert 1$ to X and get 10X. The next week, when I want to change it back, the exchange rate has changed and now 1$ is worth 20X. The dollar has gotten “stronger” and the X has gotten “weaker.” When I convert my money back, I only get $0.5. Despite me doing nothing but exchanging my money between currencies, I’ve lost money.
It can go the other way, too — if the rate changes to 1$ = 5X, then I end up with $2. I’ve gained money.
Currency is being exchanged in large quantities all the time and all over the world by countries and corporations, so it’s very important for them to keep on top of exchange rates and be strategic about which currencies they’re holding.
At an ELI5 level, it’s because not every country has hamburgers so they have to buy things from elsewhere.
Don’t have natural gas in your country? Gonna have to buy from someone else. If they won’t accept your currency, then you have to exchange it.
A bit more advanced example is debt. Say BigCorp based in U.S. wants to open an office in Ireland, so they get a loan for 100M euro to build their campus. They have to pay that back in euro, so if the value of the euro changes with respect to the USD, the cost of paying back their loan changes. If they’re not collecting enough revenue in euro, they may proactively buy & hold euro or euro-related instruments to hedge against abrupt changes in exchange rate.
Countries need to import and export things on a regular basis. When they do so, they have to exchange currency. Imports and exports are a major part of every country’s economy, and the exchange rate helps determine how strong that part of the economy is. Having a high exchange rate makes it easier to import more stuff, but harder to export more stuff. Having a low exchange rate makes it easier to export more stuff but harder to import. And most importantly, having a stable exchange rate makes the process less risky and fosters more foreign investment (in both directions).
Because exchange rates are not static.
If your country suddenly starts printing money it’s value goes down, so that 10000000000 X = 1 USD. Your burger can keep its 1X price because meat and bread are produced locally, but your imported iPhone now costs 10000000000000 X because it is imported and it still costs 1000USD.
But what you are saying also exists and is called currency pegging.
Exchange rates are basically a market for money. If I want to purchase something in the EU but don’t have any Euros, I need to go buy some. The price of the Euro is going to depend on supply and demand like any good. Demand (or lack thereof) typically comes because people in other countries want/don’t want to do business in another country.
For some currencies, like the US dollar, demand comes because the dollar is seen as relatively stable – a guy in China and another guy in Ecuador will negotiate a deal in US dollars for the stability of both parties.
Some countries will try to make exchange rates favorable for buyers/sellers in their nation, so they will either take measures to increase/decrease the supply of cash at a given time, or they will set legal limits of how currency can be exchanged (which can lead to black market currency exchanges that are closer to what the actual market demands haha).
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