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How does the currency and value of that currency in a country affect the currency and value of another country. For example whats does the following mean and how can it change:

  • Costa Rica Colon) - 548 Colones = 1$
  • Venezuela (Bolivar Fuerte) - 12 BsF = 1$
  • Europe - 1 Euro = 1.39$

How does for example, 548 Colones raise or lower when compared to the Dollar. How does the Europe raise or fall when compared to the Dollar.

Does it have to do with how the economic of each country behaves. Is it affected by trades like the Free Trade Agreement. Does export/import affect this.

  • Luis, are you doing currency trading? That would certainly be a tie in to your personal finance. If this does affect some actual decisions or trades you want to make, could you please edit the tags if I didn't get them correct? I think your question as written is pretty broad, so could you edit it? For example: "when I am about to make X trade, I notice Y event and was wondering if I should make the trade, or hold off" – MrChrister Mar 19 '14 at 18:22
  • In my job they are doing currency trading (Colon, Euro, Dollar) and one of the things I need to learn is how the related to each other. Why they fluctuate between values and well, the info provided on the question. Same went to the other question because it actually affects my daily job but I don't want to create a problem here because of unrelated stuff. – Luis Alvarado Mar 19 '14 at 20:57
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    No problems. Don't worry about the two people bickering in your comments =) I get that you could use it for work, but it is best if you can frame it for personal finance. We don't know what you do with the knowledge, but it sure saves you a comment war. – MrChrister Mar 19 '14 at 20:59
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Firstly currency prices, like any asset, depend on supply and demand. Meaning how many people want to exchange a currency to another one vs. wanting to buy that currency using another currency.

Secondly, it really depends on which country and economy you are talking about.

In emerging economies, currencies are very often influenced by the politics of that country.

In cases like the US, there are a myriad reasons. The USD is mostly governed by psychology (flight to safety) and asset purchases/sales.

In theory, currencies balance, given the inflation of a country and its trade with other countries. e.g. Germany, which was always exporting more than it was importing, had the problem of a rising currency. (Which would make its exports more expensive on foreign markets. This is the balancing act.)

  • The relative prices of major world currencies are quite literally a function of supply and demand because they're traded on super-efficient exchanges (just like stocks, bonds, commodities). See Currenex, EBS, etc. You can buy EUR for USD just like you can buy shares of AAPL for USD. Trillions of dollars' worth of currencies are traded back and forth on these exchanges each day, establishing the prices down to the fraction of a penny. Minor currencies don't appear on these exchanges and therefore fluctuate more wildly. – dg99 Mar 21 '14 at 22:21
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It's called correlation.

I found this: http://www.forexrazor.com/en-us/school/tabid/426/ID/437424/currency-pair-correlations it looks a good place to start

Similar types of political economies will correlate together, opposite types won't. Also there are geographic correlations (climate, language etc)

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