How is the value of the US dollar determined against other foreign currencies?

Question

And also, I was reading about the Turkish Lira. About 4 years ago, I remembered it was almost 1.25 million Lira = $1.

Then now it's 1.25 to 1. How can just remove those zeros? Is that even legal?

Answer 1

Like anything else -- supply and demand. Exactly the way a stock price is determined by the number of people who want to buy and the number that want to sell.

Answer 2

The value of the dollar is determined by the amount of currency in circulation along with foreign confidence in our money.  The reason it is determined by those two factors is because our currency is not grounded in any commodity as it was back in 1913 before the Federal Reserve was established and the gold standard was still in place.  So what we have in place is what is called a fiat currency, it has value because the government says it does and the rest of the world has not given us a vote of no confidence, yet.  This is why the dollar does not remain at a fixed value and fluctuates based on a world economy (scary, huh?).

This happened to Germany a little more than half a century ago when they began printing more and more money to finance WWII and the German mark became literally not worth the paper it was printed on.

The answer to your second question does not have to do with the above, the reason is the difference between the new Turkish lira and the old Turkish lira which was taken out of circulation in 2005.  The rate of exchange between new and the old is 1:1,000,000, so if traveling in in Turkey, make sure you do not accept the old Turkish lira.

Answer 3

The value of US dollar is determined  in many factors. An exchange rate is simply the rate (price) at which the currency of one country can be traded for the currency of another country. Such transactions are a necessary part of the international trade process. Such a market has a set of prices, just as any market has prices for the items traded in that market. In the currency market, that price is the exchange rate and, like any price in any market, is the result of the interaction of the supply and demand of the items in that market.. in this case, currencies.

There are some broad factors that affect supply and demand, and therefore price (exchange rate) for a currency in the exchange market. In examining these factors, we will consider the U.S. dollar as the currency in question. The first factor that can affect exchange rates is an increase in U.S. interest rates relative to the interest rates in another country. As U.S. interest rates decline relative to the interest rates in another country, the U.S. dollar will depreciate (also called "decline," "fell," or is "weaker"). This result will occur as fewer foreign investors demand dollars in order to buy U.S. assets. Because foreign investors expect to earn less on their investments in the United States, they will demand fewer dollars to buy those investments. With a decrease in the demand for the dollar, the price of the dollar (its exchange rate) will decline. Consequently, when U.S. interest rates decline, the U.S. dollar is likely to depreciate (decline) and will buy fewer units of the other country's currency. Similarly, when interest rates increase in the United States, foreign demand for the dollar will increase and the dollar will appreciate (or "rise," or is "stronger"). As a result, more foreign investors will demand dollars, the price of a dollar will increase, and the U.S. dollar will buy more units of the other country's currency. A recent example of the effect of interest rates on exchange rates is the recent action of the Federal Reserve to reduce interest rates in the United States. After the Federal Reserve began a series of interest rate cuts in 2007, the U.S. dollar has experienced a continued major depreciation against most other major currencies.

A second factor in the determination of exchange rates is a country's rate of inflation. If a country experiences an increase in its inflation rate, foreign consumers will buy fewer goods from that country, thereby decreasing the demand for the currency of that country. Thus, if the United States experiences an increase in its inflation rate, the U.S. dollar will depreciate and buy fewer units of the other country's currency. Similarly, if the inflation rate in the United States decreases, the U.S. dollar will appreciate and buy more units of the other country's currency.

A third factor in the determination of exchange rates is a country's rate of income growth. If a country's consumers experience an increase in the rate of income growth, consumers will increase their demand for all goods - including imported goods. To obtain those imported goods, that country's consumers must increase the supply of their own currency to buy the currency of the exporting country. In doing so, the exchange rate of the importing country will depreciate. Thus, if the United States experiences an increase in its income growth rate, the U.S. dollar will depreciate. Similarly, if the income growth rate in the United States decreases, the U.S. dollar will appreciate.