A simple definition of the exchange rate sounds like this: a rate for exchanging one currency for another. The exchange rate is the price of a currency, like every product or service has its own price. This means that a certain country’s currency has a certain value compared to another country’s currency. You need to be aware of the different exchange rates whenever you travel to another country and you have to buy that country’s currency. The reason for this is that the exchange rate is keeping the keeping the value of the currency at its own level.
The first method is the fixed rate. This fixed rate is being set and maintained by a country’s central bank and it is considered to be the official exchange rate for that certain currency. This type of exchange rate is sometimes called ’self-correcting’ because the market is automatically correcting the differences between the supply and the demand for the currency. This kind of exchange rate is constantly being modified based on the supply and demand levels.
It may seem like the floating exchange rate is closer to the real value of a currency because the price is being determined by the supply and demand for that currency. The black market may strongly influence the exchange rate for the currency. In conclusion, no exchange rate is being determined entirely on a fixed or floating method.
The Exchange Rate: Dollars for Yen or Yen for Dollars, Which Way is It
Excecutive Sumarry about The Exchange Rate: Dollars for Yen or Yen for Dollars, Which Way is It By Nick Larson
Now suppose that Forex exchange rate of the dollar declined by 7 percent from one year to the next against the mark. When Forex exchange as we have defined it goes up (e.g., from 100 yen to 120 yen), the dollar buys more foreign currency - the dollar has appreciated. When Forex exchange rate goes down (e.g., from 100 yen to 90 yen), the dollar buys less foreign currency - the dollar has depreciated.
If Forex exchange rate in our terms is equal to 100 yen to the dollar, the inverse would be $0,01 (one cent) per yen. If the dollar appreciates, from 100 yen to 120 yen to the dollar (dollar purchases more yen), then Forex exchange rate, expressed as the cost of yen, declines in dollar terms, in this example dropping from $0,01 to $0,0083.
The appreciating dollar means that yen purchased in foreign exchange Forex markets are now cheaper to buy with dollars, exactly the concept that trade economists wish to show. But it also means that their definition of the Forex dollar-exchange rate falls when the dollar appreciates! This is very confusing and so we define Forex exchange rate as yen per dollar, rather than dollars per yen.