We know that every country has different money, and their money values are different. Exchange rate is fluctuated every day, how it happens, everybody has curiosity to know about it. To understand about it in details, if you search in google, you can find so many explanations but difficult to understand, if you watch YouTube, even hard to understand. I try to explain about it as much as understandable.
Every country central bank should print paper money to run economy activities. Paper money should be issued by central bank by depositing gold, silver and foreign currency in own locker. It is also called back up value of circulate money, in accounting term called balance sheet [assets = liabilities]. Dollar value is fixed on the basis of gold. After define dollar value, central bank of all country publishes its exchange rate in the basis of dollar. By taking basis point in one currency dollar by all countries, then exchange rate is fixed automatically among countries. For example, today exchange of dollar and Japanese Yen is 1 dollar equal to 107 Japanese Yen, and dollar to Nepalese is 1 dollar to Rs 122, in same time, we have 1 JPY to Rs 1.14. Means we can get same amount of money Rs 122 by converting 1 dollar either we convert directly dollar to Rs or dollar to JPY to Rs. Nobody can get benefit by exchanging money one country to other countries in same time if possible, getting profit by exchanging, who should work in factory, farming and etc. Everybody wants to exchange work. So, to maintain all mechanism of money, exchange rate should be fixed on the basis of one currency that’s why all countries are agreed by taking one basis on dollar. All countries money rate is pegged with dollar .
In practice, there are two kinds of exchange rate, one is fixed and other is fluctuation. For example, China has applied fixed exchange rate. Most of countries are applying fluctuating exchange rate, which is fixed by demand and supply in market. For example, if Nepal has circulated Rs 122 by depositing 1 dollar then our exchange rate is 1 dollar to Rs 122. If Japan has circulated 107 JPY by depositing 1 dollar then their exchange rate is 1 dollar to 107 JPY. If South Korea has circulated 1210 KRW by depositing 1-dollar then their exchange rate is 1 dollar to 1210 KRW. Every country should involve in foreign trade in every day. That’s why foreign currency amount and its exchange rate are fluctuated. For example, if Nepal gathers more foreign currency by trade or by remittance, then Nepal can make more strong own money than now. Now we have 1 dollar to Rs 122. If Nepal gathers a lot foreign currency, then Nepal can publish new exchange rate like 1 dollar to Rs 100. Same time price level is played a vital role to fix exchange rate if Nepal makes 1 dollar equal to Rs 100 then so many Nepali will go to buy goods in India so central bank of Nepal cannot provides dollar or IC as demand that's why central bank compel to decrease its own money value. So, we can say that foreign exchange rate is fixed by their demand and supply and price level of market. If Nepal need more foreign currency, Nepal should decrease own money value like 1-dollar to Rs 122 to Rs 125. Then people send more money to get benefit of increasing rate. After that Nepal can gather a lot foreign currency. Again Nepal can publish new exchange rate by making strong own money like 1 dollar to Rs 100. I mentioned only foreign currency, so don’t be confuse that foreign currency included also gold and silver as well. In same time nobody can get benefit by exchanging money one country to other countries only they can get commission from exchanging but in different time period people can get benefit or loss by exchanging money among different countries because every day exchange rate is changed, that’s why so many brokers and agents are working in this field to get profit by exchanging money with among countries. Sometimes brokers and agents can also influence the exchange rate in the market by their demand and supply. But, the main official rate is fixed by the central bank of the country. And other commercial banks follow the central bank rate by making a slight difference based on their own demand and supply of foreign currencies.
My next article will be about the great economy crisis happened in 2007/8 in USA and how they overcame from that crisis. Thank you for reading.
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