To understand the currency exchange, you must first understand the history. For hundreds of years, the different currencies of the world have been backed by gold. Paper currency throughout history has been represented by an actual gold amount held in a secure location by the government which issued it.
The United States in the 1930s set the value of the US dollar at a rate that has not changed. This makes it easier for other forms of currency to be valued against the dollar because they can be based on the value of gold.
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Currency Exchange – What is it?
Today, the US dollar is still above most of the financial markets; however, it is no longer represented by the actual amount of gold or other valuable substances.
The US Dollar is now controlled by the market. ‘The two main systems for determining the exchange rate is a floating currency system and the pegged currency system.
In a floating exchange rate, the market determines the price. Which basically means, the currency is worth what the market is willing to pay? It is simple supply and demand, driven by such things, the import and export ratios, inflation, and some other relevant economic factors.
The countries of the world use this system because it has a much more stable market economy. Floating exchange rates are more widely used because they are considered the most efficient because they rely on the market to improve the level when dealing with inflation and other economic changes.