how exchange rates fluctuate
exchange rates can be free floating or fixed a free floating exchange rate rises and falls due to changes in the foreign exchange market a fixed exchange rate is pegged to the value of another currency the hong kong dollar is pegged to the u s dollar in a range of 7 75 to 7 85 so the value of the hong kong dollar to the u s dollar will remain within this range exchange rates have a spot rate or cash value that s the current market value they may also have a forward value that s based on expectations for the currency to rise or fall versus its spot price forward rate values fluctuate due to changes in expectations for future interest rates in one country versus another traders may buy the dollar versus the euro if they speculate that the eurozone will ease monetary policy versus the u s causing a downward trend in the value of the euro exchange rate examplesa traveler to germany from the u s wants 200 for the equivalent amount of euros on arrival in germany the sell rate is the rate at which a traveler sells foreign currency in exchange for local currency the buy rate is the rate at which one buys foreign currency back from travelers to exchange it for local currency if the current exchange rate is 1 05 200 will net 190 48 in return in this case the equation is dollars exchange rate euro suppose 66 is remaining after the trip the change from euros to dollars will be 67 32 if the exchange rate has dropped to 1 02 the japanese yen is calculated differently the dollar is placed in front of the yen in this case as in usd jpy the equation for usd jpy is dollars x exchange rate yen a traveler to japan would get 11 000 if they want to convert 100 into yen and the exchange rate is 110 convert the yen back into dollars by dividing the amount of the currency by the exchange rate or note that none of these travelers will be getting the market price when they exchange currency the bank or currency exchange store that they do business with will add its fee to the transaction 