The rate or exchange rate between two currencies is the rate or percentage ratio between the value of one and the other. This rate is an indicator that expresses how many units of one currency are needed to get one unit of the other.
For example, if the dollar exchange rate against the Euro (USD/EUR) is 1,324, this means that the euro is equivalent to 1.324 U.S. dollars. Similarly, if we are interested in the exchange rate of the euro against the dollar, the inverse calculation is performed (EUR/USD), this results in a rate of 0.7553, which means that the dollar is equal to 0, 7553 euros.
The birth of a system of exchange rates comes from the existence of international trade between different countries with different currencies. If for example, a Mexican company sells products to a Spanish company, want to charge in pesos, so the Spanish company must purchase Mexican pesos and use them to pay the Mexican manufacturer.
Individuals and companies who want to buy foreign currencies must go engage in Online Forex Trading. In this market determines the price of each of the currencies expressed in the national currency. At this price is called the exchange rate.
Determination of the exchange rate
The determination of the exchange rate is through the foreign exchange market. The exchange rate as the price of a currency is established, as in any other market for the meeting of supply and demand for currencies. If you look, for example, a hypothetical situation in which there are only two currencies the euro and the dollar.
The demand for dollars (euros offer) arises when consumers in different European countries need dollars to buy goods from the United States. Similarly, dollars are needed if a European company wants to buy a building in New York, when a German citizen traveling as a tourist in San Francisco or a Swedish company buys shares in a U.S. entity, but it can still be a reason to sue dollars that is pure speculation.
That is, thinking that the dollar will rise in value against the euro will cause the demand for dollars rises. When analyzing the contrary, the supply of dollars (euros demand), this is done by all companies and citizens who need euros for their needs (basically the same as we have discussed before, purchasing goods and services, investment and speculation).
Equilibrium in a competitive market between supply and demand will make the dollar against the euro or what is the same the price of the euro against the dollar. In the currency markets depreciation is known as the declining price of one currency against another.