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How is the worth of a dollar compare to the euro or other currencies determined?

Patrick

This question deserves a 5 page answer, but in simplest terms, the exchange rate is determined by all the global economic factors. Most easily, you can make a direct correlation between the rise and fall of the US stock market with the currency exchange rate in Europe. If the US stock market is up, then the value of the dollar is up, and vice versa. While this is over-simplification, it is still basically accurate.

bob_brown

In an example devoid of the ins and outs of actual currency trading, think of currency like any other commodity that is bought and sold at a store. In this case, the stores are the big banks of the world. If a store cannot sell its goods, it puts them on sale by cutting the price. On the other hand, if a store has a hot seller, it charges what it thinks it can get. Currency markets are not much different. To make a market, there must be a buyer and a seller.

The value of the dollar versus the euro is determined by the agreed upon price between sellers and buyers. market forces. Someone must have money to sell and find someone who wants to buy it, or someone who wants to buy must find someone who wants to sell.


Let's assume the Bank of France wants to buy $1,000,000 US. It offers to pay .85 euro per dollar.
Right now, no one would accept that price. But if the BofF suddenly said, OK, I will pay .91 euro per dollar, quite a few sellers would say, in effect, "I have dollars, let's tade."
The rate today by the way was $1.112 to buy 1 euro, or .90 euro to buy $1.00, US. (One rate is the reciprocal of the other.)Someone offering to pay more than the market rate would quickly find a willing seller.

You can also look at as the point on a graph where the demand curve intersects the supply curve. The basic assumption of economics is that the higher the price buyers will pay, the more sellers will respond. Of course the converse holds true. Drop the price and the buyers respond.

Right now, the US has a very negative balance of trade as more money flows out of the US than flows in. Dollars are everywhere as the US meets its overseas obligations. Result: The supply of dollars is high; the demand relatively low. On the other hand, the US buys a lot from Europe -- far more than it sells. The demand for euros in the US is high, so people who want them have to pay more. On the other hand, banks in Europe have dollars to sell. To move them out like any commodity that will not sell, the price keeps dropping.

High demand always bids the price up.
Low demand drives the price down.
The bottom line right now is that the dollar is not wanted all that much; the euro is. Hence you hear the terms "weak dollar" and "strong euro".

In the last year, the price of one dollar in terms of the euro has swung from paying 90 cents for 1 euro to paying $1.1122 US for 1 euro.
That is a swing of nearly 25% against us. So don't let anybody tell you that our economy is doing great relative to
Europe's. Folks in Europe wish the cost of their goods was a little cheaper overseas so people would buy more of them.

Viewed in more out of pocket costs, the room last year that cost me 130e in France showed up as a $117 charge on my credit card statement. This year it will cost me $145.00, in roud figures.

And if you buy the bathtub theory, we will eventually pump all the money out of the US economy. That idea says that more water goes out of the tub than flows in, the tub will become empty.
If more comes in than goes out, the tub will overflow. The wild card in the situation is that the Government controls the printing presses and can always up the supply of money, which leads to inflation.

Bootman4U

One easier answer to your question can be answered by using the on-line universal currency converter. It won't tell you WHY the numbers come out as they do (and it is based mainly on the "bank trading" rates, i.e., the rates that banks (not us)get when they exchange currencies) but it gives a good rough estimate. One GOOD (in some people's opinion) thing about a "low" dollar is that it attracts foreign investment since it costs the investor less to put their own money into dollar-based enterprises.

Christina

I think a lot of it has to do where foreign investors are putting their
money, as well as trade imbalances. In the last couple of years, a lot of
foreigners had investments in US dollars which I think is one reason why the value was high, and they also invested a lot in the US technology stocks. Now our economy is seen as more unpredictable, for a lot of reasons
including military actions in the Mideast and potential future military actions and military spending which will greatly affect the US economy. The US is running bigger and bigger deficits in both trade and the federal budget, which a lot of people relate to the value of the dollar. Bob talked about that issue.

And of course all those technology,
dot.com businesses crashing along with Enron, etc do not inspire confidence
in US business and investment in US companies. Also, the Fed Reserve Board
has kept US interest rates very low so some investors are switching to other
currencies where interest rates are higher--they cut the rates about a dozen times in the last couple of years. UK has very low interest rates, also, but I think they are still almost double the US (4 vs 2 percent or
so?). I've read that this led to investors putting money more into deutschemarks than USD. Generally, I don't think it leads to stable exchange rates when one country's costs and prices change very differently from their main trading partners. Greenspan has just signed on for a new term, I guess.

I'm sure not an economist and monetary policy isn't something I can keep a lot of interest in or understand thoroughly, but those are some of the things I've read in various financial reports and the international news as to why the USD dropped so much over the last year or so.