How are world currency exchange rates set? What determines the world price of a certain currency?
The value of the major world currencies is allowed to fluctuate freely on the world’s foreign exchange markets. Just like a concert ticket on the night of a sold-out performance, a freely floating currency’s price goes up when there is increased demand. Currencies are scare commodities, subject to the laws of supply and demand, as long as governments do not start printing too much money. When everyone wants to buy Japanese stereo systems, for example, the “price” of the yen tends to go up. The yen’s value will increase as importers around the world buy yen–with dollars, pounds or francs–to pay for the latest Japanese stereo systems and video games. Likewise, if Italians should all decide to go on vacation in Florida, the Italian lira will lose value as it is sold on the foreign exchange market to buy dollars that are used to pay for Mickey Mouse t-shirts and Disney World tickets. So if a whole bunch of Italians want to exchange their lire for dollars, the demand is pushing the price,
