How are Foreign Exchange Rates Determined?

FXClub.com Tip: The Forex market is a relatively new market, and just emerged when currencies became "floating" currencies against each other. Determining foreign currency exchange rates is a course offered by many business schools - a complete description of this subject would take many volumes! In simple terms, foreign currency exchange rates are determined using purchase power parity between the two countries, or how much does a similar item cost in each currency? There are many factors influencing currency rates including political developements, central bank policies, trade patterns and speculators. Interest rate parity is another factor, as is the level of exchange controls or protection each country has in place against unfair trade.