Price Fluctuation

Foreign exchange is a commodity, and its price fluctuates in accordance with supply and demand; exchange rates are published daily in the principal newspapers of the world and on the World Wide Web. By international agreement fixed exchange rates with a narrow margin of fluctuation existed until 1973, when floating rates were adopted that fluctuate as supply and demand dictate. Foreigners need dollar exchange to pay for goods imported from the United States, for services supplied by Americans, for interest and dividends earned by American capital invested abroad, for the purchase of securities in the United States, and for other types of transactions. Americans buy foreign exchange for similar reasons. Payments for services that must be made by one nation to another include freight charges, insurance premiums, commissions, and travel expenses.

New York City merchants importing goods from the United Kingdom buy drafts on London from their banks. These drafts, or bills of exchange, create a supply of dollars and a demand for pounds. At the same time, other American merchants sell goods to persons in the United Kingdom and receive drafts payable in pounds that they desire to convert into dollars. The foreign exchange banker buys the pounds from the American exporters and sells them to the importers who need pounds in exchange for their dollars.

Ordinarily, and without government restrictions, the rate of exchange, or the price of the currency of one country in terms of that of another, will depend on overall supply and demand and on the relative purchasing power of the two currencies—that is, on the competitive position of the two countries in world markets. At times, speculation in foreign exchange by dealers, brokers, or others becomes a major influence on exchange rates.