Types of Exchange rates

The relationship that exists between exchange operations for two currencies that are from different countries is known as type or exchange rate . The result of the operation that results from the exchange of value between these two currencies, defines the amount of one currency that is given in relation to the other. That is, the type or exchange rate defines how much money can be obtained for the other currency of a different country.

Exchange rate history

From the gold standard to the great depression

Before what is known as the first postwar period, the dollar had a strong impact on foreign exchange operations, however, little by little it lost its leadership. For this reason and in the dynamics of international trade, another currency that was more stable was thought of to take it as an exchange reference.

Gold began to be handled as the best option in this regard. The immediate benefit was to develop a strong demand that occurred when practically all developed countries allowed their free negotiation, thereby generating a new value for their currencies.

 

Breton Woods and the “beneficial imbalance”

During the period of the fateful Second World War, the exchange rate in relation to gold began to be regulated in an important way. This situation had a negative impact on currency cooperation relations between countries, since the gold factor was facing a reserve crisis.

The scenario that was presented at the end of the Second World War brought economic disaster to the countries that lost, Germany and Japan, since their economies depended on the products produced in the United States.

Precisely the United States, as a result of its triumph and scenario in international trade, managed to consolidate its economy, since it operated at its maximum level of capacity with admirable efficiency and between 1946 and 1949 it was able to accumulate surpluses in its balance of payments. and give once again a strong value to the dollar, being then, once again, a reference in the exchange currency.

A new order in international trade in monetary reserves

During the month of July of the year 1944, in New Hampshire, United States, representatives of at least forty-four nations met with the central objective of building a new international monetary order.

The fixed exchange rate was reestablished, the value of 35 dollars an ounce was established as the gold standard, with the obligation that each country define its respective parities with respect to its currency to establish an exchange order.

The “benign carelessness” and the fall of the dollar

As a result of the agreement on currency trading, Europe was able to live without great worries thanks to strict exchange controls. Their currencies ended up being exchangeable at parity one to one, and they focused on supplying central banks with dollars, with the naive idea that the shortage of the currency could be avoided.

That strategy becomes what is known as the crisis of abundance. In 1958, the member countries of the agreement realized that the operation had been excessive and that the accumulation of dollars in their reserve accounts was of no use to them.

Dollar bills

The European Monetary System (EMS)

In order to positively confront this situation, on December 18, 1978, the members of what became the predecessor of the European Union, the European Economic Community (EEC), made an exchange stability agreement. The European Monetary System is developed, with the aim of regulating unstable fluctuations in exchange rates.

world currencies

The exchange rates that exist are:

nominal exchange rate

This defines the relative price between the local currency and a foreign currency. These are established in the foreign exchange markets, taking mostly euros per dollar.

It is a relative value that links the price between two currencies. Normally it refers to the price of the dollar against the particular currency, that is, how many coins would it take to buy a dollar.

The exchange rate handled in this way shows trends that may be downwards or upwards, reflected in an appreciation or depreciation of the currency against the dollar.

These types of operations are carried out in the well-known exchange houses. Coins are quoted with a buy price as well as a sell price, as the case may be.

In this type of operations, appreciations and depreciations are presented, in the nominal exchange rate.

That is, there is an appreciation of the currency, when a smaller amount of national currency is required to acquire US dollars. Conversely, when there is a nominal exchange rate depreciation, the exchange rate rises.

banknotes of europe

Real exchange rate

Its main function is to measure the degree of competitiveness that products have with respect to foreigners. In other words, it basically results from multiplying the nominal exchange rate with the price level abroad and dividing the result by the domestic price level.

So, if the internal price level is higher than the external price level, there is a drop in the real exchange rate, indicating a drop in the level of competitiveness of our products with respect to foreign markets.

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