The exchange rate keeps changing daily. It has kept people confused for a long time. Many believe that these fluctuations are the real reason for ups and downs in the economy. But more than this, a number of myths are doing the rounds.
Here are the most common myths about currency exchange:
Myth 1: To fix the exchange rate, economic volatility must be reduced.
Truth: Though it seems like that by fixing the external value, the amount of economic volatility can be reduced, but unfortunately it is far away from the truth. There is no denying the fact that exchange rate volatility is a problem for all those involved in trading goods and assets throughout the international boundaries as it creates uncertainty and risks. But, by fixing the exchange rate, one can remove a vital portion of the economic volatility people often face on a day-to-day basis.
Where does the problem lie?
It is incredibly pertinent to see that in an economy where goods and services worth millions of dollars and assets are traded daily, no alterations should be expected in the exchange rate instantly. One must accept that real-world events control changes in the exchange rate whatsoever.
The demand for real, as well as financial assets, lead to changes in the exchange rate.
Truth: When the investors think of particular shares as a better investment and the bonds as less risky, the demand for such assets would then pave the way for appreciation of the currency. Additionally, alterations in fiscal or monetary policies can lead to changes in the exchange rate due to the reactions to policy-induced changes made in income tax rates or short term interest rates on the demands by global investors.
Myth 2: A fixed exchange rate can prevent misalignment in the exchange rate
Truth: In some economies, it is felt that the currency is either overvalued or undervalued. It is believed that if one can fix the exchange rate, the misalignments can be prevented. But just like the first, this concept too holds on the surface only. However, it would be easy if one was aware of them so that they could be fixed at the right time. The issue is that the quotation marks can be used in a not so organized manner with no empirical support or theoretical.
If the value of the exchange rate is measured by selling and buying single traders in the market for the exchange rate, many would think of the exchange rate as to wrong. However, the expectations or events taking one to the market to carry out the transactions one can sum up by saying that exchange rate is correct so much in a line that says that foreign exchange is a market that runs on demand and supply. It doesn’t suggest that the real value for the exchange rate would remain constant. Just like the economic events, the expectations keep changing from day to day, so does the exchange rate clearing the foreign exchange market.
Summing up
Since we have cleared the myths often plaguing the truth, hope your confusions have been put to rest and you can exchange money in Toronto or any other place easily.
If you want to learn more about our blog, please click here.
