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exchange rates determination

What is happening to the value of the U.S. dollar these days? What causes the value of the U.S. dollar to rise or fall? Who demands U.S. dollar? Who supplies U.S. dollar? When we purchase German products, does our demand for euro go up or down? What are freely floating exchange rates all about, and how do they work? How can the falling U.S. dollar impact your travel expenses? Why would a cheap dollar relative to other nations' currencies be good or bad for U.S. trade?

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The value of currency is determined by its supply and demand. Its supply and demand, in turn, is due to trade in goods and services. If the demand for US exports goes up, the foreign importers need dollar to pay for their imports from the US. Therefore the demand for dollar will increase. Consequently, the value of dollar in terms of its trading partner will go up. Normally when a country has a positive balance of payment account, due to positive net export, its currency value will increase and vice versa.

On the supply side, the Fed is the only authority responsible for money supply. The Fed can control the value of dollar by ...

Solution Summary

The value of dollar is determined by supply and demand condition, which in turn, is due to demand for the export for goods and services. The increase in export demand will derive the value of dollar up. Higher dollar is good for purchasing abroad but is bad for exporting goods and services.