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economic importance of currency exchange

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Explain the economic importance of currency exchange?

Describe how international trade affects U.S. economy.

Explain how foreign exchange rates are determined.

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economic importance of currency exchange and how foreign exchange rates are determined

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Currency exchange is essential to a global economy. Without it, it would be virtually impossible to trade with foreign countries. To make purchases and sell their own goods internationally, firms need to change units of one currency for units of another currency. For instance, when a German firm trades with a U.S. firm, the U.S. firm may pay in dollars. However, the German firm needs to pay many of its costs in Euros.

Exchange rates can hamper a government's ability to control its economy. A fixed exchange rate requires that the central bank intervene to keep the currency from changing value. Market forces will tend to move the exchange rate away from where it is fixed. If the exchange rate is tending to increase, thus devaluing the domestic currency, the central bank will need to buy domestic currency and sell foreign currency to balance this force. Thus monetary policy ...

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