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Introduction to Exchange Rates


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The Importance of Currency Markets
Introduction to Exchange Rates
In virtually all modern economies, money (i.e. currency) is created and controlled by a central governing authority. In most cases, currencies are developed by individual countries, though this need not be the case. (One notable exception is the Euro, which is the official currency for most of Europe.) Because countries buy goods and services from other countries (and sell goods and service to other countries), it's important to think about how currencies of one country can be exchanged for currencies of other countries.

Like other markets, foreign-exchange markets are governed by the forces of supply and demand. In such markets, the "price" of a unit of currency is the amount of another currency that is needed to purchase it. For example, the price of one Euro is, as of the time of writing, about 1.25 US dollars, since currency markets will exchange one Euro for 1.25 US dollars.

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