The U.S. Currency Exchange Rate: A Brief History?

Answer 1

Gold is a metal of adornment in jewelry, and a sign of wealth. The currencies of the world were anchored by gold for centuries. A piece of paper currency issued by any government represented the actual amount of gold held by that government.

The United States set the value of the dollar at a single level in the 1930’s, and the cost of an ounce of gold was worth $35. After World War II most countries based their currency values on the U.S. dollar. Since the value of gold was widely known according to the US dollar, then the value of any other currency could be based on its value in gold. For example, a currency worth twice as much gold as the U.S. dollar was worth 2 dollars.

This system was basic, and eventually was out-grown due to the U.S. dollar suffering from inflation, and other World Currencies became more valuable. In 1971, the U.S. removed the gold standard all together which meant that the market determined the value of the dollar. This led to utilizing a US currency exchange rate.

The U.S. dollar still is a powerful force in financial markets, and exchange rates are often expressed in terms of U.S. dollars. The euro, British pound, Canadian dollar, Australian dollar and Japanese yen account for 80% of currency exchanges altogether.

The world uses two systems to determine a currency’s exchange rate. They are floating currency and pegged currency.

Floating Currency - A currency is worth whatever buyers are willing to pay for it. It is determined by supply and demand which is driven by foreign investment, import/export ratios and inflation.

Pegged Currency - The exchange rate is set artificially and maintained by the government. The rate is set in comparison to Another Country like the United States, and the rate doesn’t fluctuate. In order to maintain a pegged rate, a government has to work diligently, and their national bank most hold large reserves of currency to meet supply and demand.

The US currency exchange rate is based on a floating currency as most governments are. Every major nation uses the floating currency method, and is considered most efficient of the two because the market will correct the rate to reflect inflation. It isn’t perfect though, and if a country’s economy suffers from instability, a floating system scares investors away.