Like how do they decide if the dollar rises or falls? How do they decide that the Kuwaiti currency should have the highest value of all the currencies in the world?
Mr. Economist: Could you please explain it to me in short? Why is the Kuwaiti currency so expensive?
haha. I did not understand anything. You are a very wise person, but I am so dumb. Can you please explain it so that I understand. Please.
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June 23rd, 2008 at 12:24 pm
It all has to do with the demand for a currency.
The determinants of this are: Interest Rate Differentials, Inflation Rate Differentials, Growth Differentials, Speculation.
June 23rd, 2008 at 12:24 pm
Well there are 2 ways, either they can back the currency with gold or silver, so a dollar would always be worth the same.
the other way is to put it on the market, and let its value go up and down, the value is then valued on faith that the currency worth something. Also the more money there is the less it can buy, so its devalued.
June 23rd, 2008 at 12:24 pm
All currencies (paper money) is fiat currency. That means governments determine the supply of money using various tools such as interest rates and how much reserve banks must keep on their balance sheets rather then lending it out. Since all money is paper, the value is determined by the actual supply of that paper money, think of how many people wanted a wii and how many there actually were. Now how do you trade one paper money for another paper money like the Euro? Its traded around the clock in the forex market, very similar to how oil prices are traded or stock prices. Currencies against one another fall and rise based on demand. Demand is typically based on your countries exports and debts. So a country with a lot of natural resources to trade like Australia will see their currencies strengthen as people must trade in their money to buy Australian money in order to buy wheat. Also depending on their interest rates people will chase higher yields around the world. For example Iceland has an interest rate around 15% while the USA rate is around 2%, you can make an extra 13% by changing your dollars for the Krona, but when you are ready to switch back to dollars you will be subject to a different exchange rate that might not be in your favor, so there is risk involved.
The dollar is falling because of supply and demand. The US has a huge trade deficit at a rate of 2 billion a day, we import much more than we export because most of the world cannot afford what we sell. We also make very little manufactured products so we need to import a lot of that particularly from China. We also run a massive government deficit forcing us to borrow more and more everyday. That money is causing our money supply to get larger and larger. So a combination of too many dollars is causing our currency to fall, its also lowering the amount of goods you can buy with that dollar. Its not that prices are rising its that the dollar is buying less and less because there is just too much of it. Blame lies completely with the Federal Reserve, they set the supply of money and don't let anyone tell you otherwise.