Sam B
Lv 5
Sam B asked in Social ScienceEconomics · 1 decade ago

Can someone explain to me why the dollar changes value and how it is decided?

Update:

Sorry I ment more in terms of compared to other countries money... Like why the Euro is worth more than the Dollar

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  • NC
    Lv 7
    1 decade ago
    Favorite Answer

    A currency (including the dollar) changes its value for the same reason other financial assets (such as stocks and bonds) do: supply and demand imbalance. If there are more people that want to buy a certain currency than there are people that want to sell it, the buyers have to offer sellers an inducement to sell in the form of higher price. Conversely, if there are more people that want to sell a certain currency than there are people that want to buy it, the sellers have to offer buyers an inducement to buy in the form of lower price.

    How it the exchange rate decided? It's not. There are about 300 major banks worldwide that stand ready to buy and sell the major currencies at slightly (sometimes not so slightly) different rates. If a particular bank sees a lot of demand for a certain currency, it raises its price; if it sees a lot of supply of a certain currency, it lowers its price. At the end of the say, the bank (if it's large enough) gets a phone call from The Wall Street Journal and/or Financial Times and tells them what the going rates are. The newspaper averages the rates from all banks it polled and publishes the average.

  • 1 decade ago

    Currency exchange rates (at least for countries that allow their's to float) are determined by the supply of and demand for one country's pieces of paper (money) relative to another country's paper. The dollar is tanking against the Euro because US exports to European countries relative to European exports to the US are small.

  • 1 decade ago

    if ppl start to get paid too much and have too much money

    they can by things too easily

    AND SO.. if ur selling tomatoes, for example, and all of a sudden ur running out of stock because ppl are getting more money u can raise the price...

    because ppl have enough money to buy it a higher price now and u'll have stock for a longer time...

    so yeah when that happens all of a sudden if tomatoes were one dollar and now they're three... then one dollar is not as valuable cause u can't do as much with it..

    hope that helps =]

    Source(s): took economics last year and taking marketing this year
  • Anonymous
    1 decade ago

    I'm think (only think) that if we were using more and more of something it would raise price. Eventually everything else would raise in price also. (or most things). When everything has risen in price then the amount of a dollar can't buy what it used to be able to. This is just what I think, but I'm still open to ideas, because this is just a theory, and I'm not sure if this is why. I just think it's why.

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  • 1 decade ago

    NC nailed it. All I can add is that I think the specialists in each bank who actually make the decisions are called arbitagers. Very high pressure intense job where one wrong move could cost a bank billions in seconds. I believe that did happen in Japan a few years ago.

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