Hatrack River Forum: How do Exchange rates work?

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Posted by Katarain (Member # 6659) on :

I looked up the exchange rates between the British pound and the American dollar...and I'm confused. I'm used to the British pound being stronger than the American dollar, so I'm pretty sure I understand this all backwards.

One site says: British pounds to 1 USD.
currently: .568408

And if I reverse it: American dollars to 1 GBP.
currently: 1.7593

Let's say I have 1 dollar and I'm exchanging it based on the exchange rate above, no extra fees. I'm not even sure which exchange rate I'd use...but I'm guessing the second. So for 1 dollar, I'd get back 1.7593 pounds??? How is that right? Did the pound go down?

And let's say I have 1 pound, and I'm exchanging it for dollars... no fees.. I'm assuming it's the first rate I use. So for 1 pound, I get .568408 dollars?

Is that right?? Is it backwards??

Thanks,
Katarain

Posted by Corwin (Member # 5705) on :

quote:
One site says: British pounds to 1 USD.
currently: .568408

And if I reverse it: American dollars to 1 GBP.
currently: 1.7593

Should be backwards unless something major happened in the last couple of hours. But from what you posted from the site I'd derive the same meaning as you did... Weird... o_O

Edit: Do you have a link to that site?

Posted by Katarain (Member # 6659) on :

Currency________In US Dollar______Per US Dollar
British Pound___1.75800____________0.56883

This is from another site... a table at msn.

I don't really get it either...

-Katarain

Posted by Katarain (Member # 6659) on :

http://www.x-rates.com/

You have to pick currency from the drop down menu to make a graph. I got the number from the bottom of the graphs.

I'm thinking that it means how many british pounds you get for every dollar... instead of the way I was thinking...

-Katarain

Posted by Corwin (Member # 5705) on :

Now that's different:

A British Pound values 1.758 in US Dollars, and you'd receive 0.56883 British Pounds per US Dollar. That's how I read it.

Posted by Jacare Sorridente (Member # 1906) on :

This should be pretty clear:
Your first example says British pounds to 1 USD.
currently: .568408

This clearly means that if you give them 1 US dollar you will get in exchange .568 British pounds. Coversely, if you give them one British pound they will give you 1.759 American dollars.

Posted by Corwin (Member # 5705) on :

Wait, I haven't read well the infos from the first site. I think I read your version and somehow it stuck. Yeah, it seems that it's what you said in the post with the site link. [Big Grin]

Posted by Katarain (Member # 6659) on :

Okay, that makes a lot more sense.

Thanks. [Smile]

-Katarain

Posted by Dagonee (Member # 5818) on :

quote:
One site says: British pounds to 1 USD. currently: .568408

This says that if you want to get 1 USD, you need to give them .568408 British pounds.

quote:
And if I reverse it: American dollars to 1 GBP.currently: 1.7593

This says that if you want to get 1 British pound, you need to give them 1.75953 USD.

The site's not backwards; you interpreted it backwards.

1.7593 * .568408 = 1.So USD = 1.7593 BP and BP = .568408 USD.

If you a certain amount of currency and want to find out how much it's worth in the other currency, use the equation with the other currency alone on the left. Plug in the known number and multiply.

Dagonee

Posted by Katarain (Member # 6659) on :

I've always heard it was stronger...

Aren't exchange rates a measure of how financially stable a country is??

If I get a million clams for my one dollar, I'm going to assume that the country is in bad shape, since their money isn't worth anything...

-Katarain

Posted by Katarain (Member # 6659) on :

Dag,
That's what I meant...that I thought I was interpreting it wrongly.
-Katarain

Posted by fugu13 (Member # 2859) on :

Katarain: the numerical exchange rate has nothing to do with the financial stability of a country, or even the strength of a currency. What matters is the rate of change of the exchange rate coupled with the local buying power of each currency.

For instance, the japanese yen is strong against the dollar even though a dollar gets you over 112 yen, because one can buy more in america with yen exchanged to dollars at that rate than one could buy with the same yen in japan.

Since a really high numerical exchange rate does have some psychological impact, as well as making bookkeeping messy, some countries who have one have revalued their currency in the past, issuing new currency which is worth many times what the old currency was. This doesn't change the real value of anyone's money, or the real exchange rate, just the units one counts it in.

Also, the exchange rates you see aren't set in stone or anything. People can buy and sell currencies for pretty much whatever they want to, often on a currency exchange. Many times this exchange takes place in the form of monetary instruments like bonds, as people bet on the long term prospects of various currencies. The exchange rates you see, though, are whatever the currency exchange markets were at between those currencies at some commonly agreed upon time in the recent past.

Places that buy and sell currencies with the common person set their rates based on those exchange rates (they take a small markup for themselves). Banks, however, as a perk to people who use their services, will often do exchanges for things like credit card transactions at the current set rate of exchange.

Some nations, like China, fix their exchange rates. People can still buy and trade, but everybody deals with the government for most purposes because one party is getting the short end of the stick in any currency exchange (that is, they could have gotten a better exchange rate from the government). Some currency trading still takes place, just usually around the government rate, but also at slightly different rates in order to shore up bond holdings and the like.

Posted by Jacare Sorridente (Member # 1906) on :

The exchange rate doesn't indicate much of anything without historical perspective. For example, you can get 112 yens for a dollar, but that doesn't necessarily mean that the Yen is in bad shape. As a matter of fact, when a currency weakens it can potentially help the nation in question. In the case of the US, for example, we are a heavy debtor nation AND our currency is the world standard, which means that many banks have hordes denominated in dollars. What that means for us is when we devalue our currency it is easier for us to pay our debts. A devalued currency also changes the cost of imports and exports, which is why there has been huge pressure on China to allow their currency to float rather than artificially maintaining it at a set level by buying up dollars. When China revalued their currency it means that Chinese imports in the US cost more and American imports in China cost less, hence there is a shift in the trade imbalance.

edit- stupid Fugu. Wait till I post my examples before posting yours. Now I look unoriginal [Mad]

Posted by Katarain (Member # 6659) on :

Oooooh. That makes sense. I didn't even think about how much you could buy with the money.

Thanks. [Smile]

-Katarain

Posted by fugu13 (Member # 2859) on :

They are sort of the really obvious examples, aren't they?

Posted by Jacare Sorridente (Member # 1906) on :

Yes they are.

Posted by Katarain (Member # 6659) on :

Well, obviously not obvious to EVERYBODY. [Frown]

Posted by fugu13 (Member # 2859) on :

I mean to someone familiar with the field who's looking about for examples to use.