How does currency value calculated against other countries?

I want to know, why is currency value different. What are the reasons behind it.|||There are 3 systems to determine exchange rate.


1. a float system, it is supposed to determine by demand supply in the money market without intervention.But the central bank can influence the rate by adjusting interest rate,or capital control.


2. a fixed system, a local currency is pegged to the hard currency. Even when it is a threat of currency war, it will never let it go.It is called manipulation. It might have a small bound to let the exchange rate goes up and down within the frame.


3.A basket of currency.The central bank will determine the par exchange rate everyday based on the average value of many hard currencies in the basket.It is called managed float.


There are also hypothetical exchange rates such as PPP and Big MC. index.|||Currency valuation / foreign exchange is a very complicated matter. Many factors combine to determine the exchange rate - including "interest rate parity" (IMO the primary driver); fiscal and monetary policy, purchasing power parity, economic growth outlook.





Interest rate parity - from Wiki - see link below:


Interest rate parity is a non-arbitrage condition which says that the returns from borrowing in one currency, exchanging that currency for another currency and investing in interest-bearing instruments of the second currency, while simultaneously purchasing futures contracts to convert the currency back at the end of the holding period, should be equal to the returns from purchasing and holding similar interest-bearing instruments of the first currency. If the returns are different, an arbitrage transaction could, in theory, produce a risk-free return.





Looked at differently, interest rate parity says that the spot price and the forward, or futures price, of a currency incorporate any interest rate differentials between the two currencies assuming there are no transaction costs or taxes





A simple example of covered interest rate parity is shown on the page in the link.


As you might deduce from the example, when interest rates rise in a country(A), capital tends to flow to that country. With more demand for that currency(A) (because of higher returns in that country and other factors), that currency(A) tends to rise in value in response. This means that the value of the foreign currency (B) converted to buy currency A will fall "against" currency A.





Hope this helps.|||The more money is printed the less it is worth.