How Exchange Rates Are Determined

The prices of currencies are one of the most tricky subjects in economics. When will a currency appreciate, and when will it depreciate?

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Of course, this depends on supply and demand in foreign exchange markets. But, what determines this? There are two major theories in economics that try to explain this. The first is purchasing power parity and the second is interest rate parity. In this video, I discuss both as well as highlight the role of arbitrage and expectations.

Narrated and produced by Dr. Joeri Schasfoort (University of Cape Town)

[-haclong]

Fun fact: Currency exchange is the largest market, as almost all goods are changed from currency zones.

[killinchillin]

Damn bro, this exchange thing is a massive rabbit hole.

[idonnow]

Small correction @ 4:42, prices in Europe wouldn't be 20% higher than in the US, they would be 25% higher. an extra 20 units over a base price of 80 is a 25% increase. The 20% figure is from the opposite direction, a decrease of 20 units from a base of 100 is a 20% decrease. Thus the correct statement would be that US prices are 20% lower than in the EU. Nevertheless great video as always

[Alozhatos]

I still remember Malaysian Ringgit crash in 2015 due to oil glut and 1MDB Scandal. Ringgit fell in 2015 breached to RM 3.00 for 1 Singapore Dollar in September - October 2015. 1 USD = RM 4.44 in January 2016. Massive shock happened in Malaysia. At sudden my quotation to buy washing machine from USA skyrocketed.

[philipberthiaume]

Just a brilliant, clear video. You definitely deserve a lot more subs. The more knowledge people gain in basic macro economics, the more they will understand when political leaders are completely ignorant on the topic.

[alesh]

You might want to look into the dynamics of the JPY/USD exchange rate vis a vis the real economy.

In the case of Japan, when the Japanese economy worsens, the exchange rate most of the times goes up (e.g. ¥70/USD), and when the economy improves, the exchange rate most of the times goes down (e.g. ¥120/USD).

Classical economic theory would seem to suggest that when an economy worsens, then demand for that currency should go down, and vice versa. Japan moves the opposite.

[Alexander-pzwc]

Could you maybe explain the dynamics behind the lowering of the Indonesian interest rate from 8% to 0.1% for new Japanese investors?

[inferno]

I will have to watch your video a few times to digest everything you said.

[pellumbtusuni]

This channel is the best. I wish this guy was my professor at my university!

[Wgenius]

Hey Joeri, thanks for the video! However, I didnt quite understand the central question of how inflation and interest rates actually influence currency prices. Im very curious to understand these topics better. Could you please do a more in depth follow up on this video with more practical examples? Best Regards

[secteurh]

Great video. But it seems that one actor influencing the exchange rate is left behind : central banks buying or selling foreign reserves. For sure, it is a reaction to arbitrageurs and speculators but overall it counts a lot. I agree that the direction of causality becomes blurred nevertheless.

[daisysaelenhafstad]

sorry but I fall asleep half way. His voice is so relaxing to listen to

[adamkiraly]

its amazing how well made the videos are.

[honestmorena]

Buttering system was very straightforward! And gold standard was straightforward. Why they made they new system this complicated

[FincentVan]

great videos! You got yourself a subscriber ;)

[kit_kat_hi]

Thank you! Still slightly confused, but much less than before 😅

[rushdHBTS]

Influence of Government Financial policy on Exchange rate mechanisms not mentioned.
Which I think The prime factor for exchange rate . Inflation and Interest rate comes next .Also other new currency like digital crypto will have significant influence in Future.

[igorilin]

Your lessons are amazing. Finally I know how to work with binary options

[jasmikko]

I think the supply and demand of foreign is mainly (or heavily) affected by countries trading with each other.

[abelardodiaz]

But how they set the exact number? Isn't that set by each country? Or the current exchange rate is set by FX market