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Foreign Exchange Rates

Foreign Exchange Rates

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Published by MainSq

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Published by: MainSq on Apr 19, 2011
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04/19/2011

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Foreign exchange rates
Introduction
This is the rate that is used to weigh the value of a currency in relation to how much of anothercurrency it can buy or can be exchanged with. Foreign exchange rates of a currency to otherinternational currencies mainly depends on the type of the exchange rate regime that has beenadopted in the country and include the following.
Fixed exchange rate
This is where the government through its policies fixes the rates at a given value and incase itrises or drops ,the government interferes to buy international currencies through the centralbank.The main criticisms to this regime are;
o
 
I
t doesnt automatically adjust the balance of trade thus incase of a trade deficitthe demand for foreign currency increases and this will lead to increased price of the foreign currency compared to the domestic currency.
o
 
The government must have to spend more resources piling up foreign currencyso that incase the fixed rate changes they can afford to bring back the rate bybuying more foreign currency.
Flexible exchange rates
This is the regime where the rate of exchange depends on supply and demand .This is the mostpreferred exchange rate regime as it allows the economy to automatically adjust back to fullemployment level with minimum government intervention.
Floating exchange rate
 This is the regime where the domestic currencies value depends on the foreign exchangemarket, such a currency is called a floating currency.
Linked exchange rate
 This is the regime where the domestic currency is linked with another currency. Thegovernment does not interfere with the foreign exchange market under this regime.

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