How is the value of currency weighed and calculated relative to other currencies.?

2 Answers

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   Jeremy on Dec 26, 2011 Reply

   Currency value is determine by the purchasers of the currency. These are primarily travelers, governments and Forex traders. FOREX stands for Foreign Exchange. There are many factors that currency traders, governments and businesses take into consideration in determining the fair market value of a currency.

   Fair mrket value is the price at which a willing buyer and a willing seller come together. The buyer must factor in many elements and considerations to try to accurately assess a currency’s value at any given time.

   Factors affecting currency value are political situation and stability of the country, economic situation (jobs, unemployment, work ethic, infrastructure, inflation and direction of the economy), perception from outside, demographics, isolation vs. openness (for example China is becoming more open, more transparent and this helps. Cuba is very closed and isolated. Venezuela is becoming more isolated by some of its recent actions), natural resources, weather factors such as drought, tsunamis, earthquake and floods, war and conflicts.

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   Fxcc on Dec 26, 2011 Reply

   Hi,

   I will try to provide you with a short explanation, I hope it helps.
   The value of a currency is calculated depending on certain national macro-economic factors such as inflation, the current-account deficit, public debt, the ratio between import and export prices, political stability and economic performance.
   Taking into consideration these factors, each country’s Central Bank will calculate the country’s currency value and it will influence the rate of that currency, by increasing its value, if the country has a good economy and politics, or by decreasing it if the country has a weak economy.

   Let’s take a simple example-posting a letter. You go to the post office to send a regular 20 grams letter from New York to Chicago and it will cost you $0.20. If you wish to send, this time, a 20 kilos package from New York to London, it will cost you $150. What influences the cost of posting an item? The distance between the sender and the receiver, the weight of the package, the speed of delivery, for example if you wish for the package to be received in 1 day rather than in 1 week, you have to pay extra.
   Same idea applies to currency’s value, to have a strong currency you want to have a low inflation and a low public debt, good exports and political stability. Since these factors vary in time, the value of a currency varies as well.
   If at a specific time the value of EUR is 2.5 and the value of USD is 1.6, when you divide them to get the exchange rate, EUR/USD = 2.5/1.6=1.5625 which means that 1 EUR = 1.5625 USD.

   Best regards,
   FXCC Representative

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