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Exchange rate: what is it?

In the economic and financial scenario it is quite common to hear about the exchange rate, but what is this rate? Check here on Renda Brasileira what it is, what it is for and how it works!

What this article covers:

What is exchange rate?

Exchange rate is the referring value the difference between the currency from one country to the currency of another. The rate is determined by the price of one of the currencies compared to the other, in this way, the rate is the amount of payment to be able to exchange one currency with another.

How is the exchange rate determined?

The exchange rate is determined through the exchange rate regime that each country has, however, it is also influenced by internal and external factors, which can both strengthen and weaken one currency relative to another.

Source/Reproduction: original.

We can say that the exchange rate is determined by the supply and demand of the currency from one country to another. A good example is the dollar, which is a strong and highly valued currency due to the United States’ trade relations with other countries.

It is worth remembering that in addition to economic factors, political decisions can also strengthen or weaken a country’s currency, causing its exchange rate to change.

What is the impact of the exchange rate on economies?

The exchange rate has a great impact on many economic indicators, such as, for example, interest rates, capital flow, foreign trade, and also impacts on the country’s inflation.

An example is when the dollar becomes more expensive compared to the real, Brazil starts to reduce its import chain and begins to pay more attention to the sale of goods to other countries.

What is the impact of the exchange rate on economies?
Source/Reproduction: original.

Still in relation to inflation, during periods of highs, central banks usually increase basic interest rates to reduce the country’s economic activity and control market prices.

When there is a change in interest rates, this also causes a change in the foreign exchange market, which can lead to a currency being more appreciated than other currencies that have kept interest rates constant, as it has increased the movement of capital into the country.

Why does the exchange rate fluctuate?

Three exchange rate models are used in the world: floating exchange rate, exchange rate band and exchange rate. Here in Brazil the floating exchange rate is used. In addition to our country, most countries also use the floating exchange rate as their official rate.

The exchange rate fluctuates in value according to supply and demand from one country to another, which causes the values ​​of countries’ currencies to change constantly.

Other factors that affect the fluctuation of the exchange rate are:

  • The ability to attract investors to the local economy;
  • Political situation in the country;
  • Economic situation of the country;
  • Import and export conditions;
  • Internal and external interest rate;
  • Fiscal and monetary policy used.

These are some of the factors that can help both positively and negatively in the exchange rate fluctuation of a country’s currency.

Floating exchange currencies do not have State intervention to determine the value of the currency, which leads to it having a free price, however, here in Brazil the Central Bank has the permission to intervene in the exchange rate, this is known as dirty fluctuation .

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