What Exchange Rates Exactly Are

You hear about foreign exchange market, FX, forex, exchange rates etc everyday but things aren’t exactly clear for you. Here are some pieces of information that will hopefully help you understand these quite confusing terms.

The first thing you should understand is what exactly an exchange rate is. A simple definition of the exchange rate sounds like this: a rate for exchanging one currency for another. The exchange rate is the price of a currency, like every product or service has its own price. This means that a certain country’s currency has a certain value compared to another country’s currency. You need to be aware of the different exchange rates whenever you travel to another country and you have to buy that country’s currency. For instance, if you are from France and you travel to the U.S.A and the exchange rate is 1.10 dollars for a Euro, this means that you can buy a bit more than a dollar for your Euro.

If you are worried about how much you can buy for your currency in another country, you should know that one product’s price should theoretically stay the same, regardless the currency it is used to evaluate its value. The reason for this is that the exchange rate is keeping the keeping the value of the currency at its own level.

If you are wondering about the way this exchange rate is being calculated, you should know there are two methods that are being used for this. The first method is the fixed rate. This fixed rate is being set and maintained by a country’s central bank and it is considered to be the official exchange rate for that certain currency. The price level for the currency is being determined by comparing it to a major currency like the Euro or the US dollar. The central bank is buying and selling its own currency in order to keep the exchange rate at the level which has been previously set.

Another method for setting the exchange rate for a currency is the ‘floating’ method. This method is determining the exchange rate by using the supply and demand balance for that currency on the private market. This type of exchange rate is sometimes called ‘self-correcting’ because the market is automatically correcting the differences between the supply and the demand for the currency. This kind of exchange rate is constantly being modified based on the supply and demand levels.

It may seem like the floating exchange rate is closer to the real value of a currency because the price is being determined by the supply and demand for that currency. This is not entirely correct as this kind of exchange rate is very sensible to speculations. The black market may strongly influence the exchange rate for the currency. Therefore, a fixed regime should be also applied as it permits the market to put pressure on the exchange rate.

A Brief History of the Exchange Rates

Where did these exchange rates come from? Have they always been used in relation to foreign currencies? How did they evolve along the years?

If you wonder about these things, the first thing you should know is that the exchange rates haven’t been used since the beginning of trade. Gold was the thing used to back the currencies for a very long time. What did this mean? It meant that a currency issued by a government represented a certain amount of gold that existed in that government’s vaults. The fact that a person owned that currency meant that person really owned a certain amount of gold.

But this balance was about to be changed as the US government set the value of the dollar at a unique level: 35 dollars would buy you one ounce of gold. This thing happened in the 1930s. After the end of the Second World War, countries started to consider the US dollar a strong basis for their currencies. The reason for doing this was the fact that the US dollar value was well known, so a currency based on the dollar would actually be based on gold. For instance, if a certain currency was worth three times more gold than the US dollar, then it actually worth three US dollars.

But this system became outdated quite fast due to the amazing evolution of the world economy. The US dollar started to be affected by inflation, meaning that it could purchase less and less goods. This wouldn’t have been very bad if other currencies hadn’t become stronger and more stable than the US dollar. In the end, the US dollar had to accept its fate that it had stopped being the as strong as it thought, so its value was decreased from 35 dollars for one ounce of gold, to 70 dollars for one ounce of gold.

In the 70s the US dollar gave up on its gold standard. The US dollar value started to be determined by its market strength. Although the US dollar stopped being the standard for world currencies, it never stopped being the most important currency on financial markets, as many exchange rates are still expressed in US dollars. The Euro has also become a strong currency, even stronger than the US dollar. These two currencies together represent about 50 percent of the exchange rates.

Men, Women and Their Finances

What do you worry about most when it comes to your finances and debt or your credit card repayments? It seems that men and women have different outlooks and think differently about their finances. A survey was carried out to see whether men and women thought differently or the same about their finances.

Women tend to look at their current levels of debt while men tend to look to the future and are more likely to plan ahead when it comes to their finances. Women worry more about how they are going to pay off all their current credit card bills, store cards and loans along with their mortgage, shopping and living expenses with three quarters of women doing so, meanwhile less than 50% of men worry about the same thing. Only 13% of men know what their current debt levels are.

While men are laid back about their current debt levels they are better prepared for the future. Men are better at investing their money with half of all men investing in an ISA while only 35% of women are doing the same. Only five out of ten of women have a savings account with men in the lead with six out of every ten. Three quarters of men are paying into a pension for when they retire while only half of women are preparing for their retirement.

The only things that were found to be very little difference in when it came to our finances was the fact that both men and women have little knowledge of credit reports and how they work, although we think we do. Three quarters of men and women said they new what affected credit scores and how companies make their decision but nearly all got at least one question wrong when asked about credit reports. Only 5% of men and women have inspected their credit report in the last year.

1 in 4 of people asked did not realize that late payments affected your score; just over 40% of people did not know that if you have asked for credit regularly then this can also affect your credit score. Three quarters of people wrongly thought that if you had unpaid household bills that this would affect a decision made by lenders. Unbelievably, 60% of men and 67% of women thought that credit reference agencies make the decisions about credit applications, whereas it is the credit card companies, banks and other lenders that make the decision.