Exchange rate to USD by country: the latest data

What factors determine the exchange rates

The exchange rate is the price of one currency expressed in units of another currency. We say that a currency is appreciating/depreciating relative to another currency if it takes more/less units of the other currency to purchase it.

The exchange rate appreciates when the demand for the currency increases, i.e. when more people want to buy it and depreciates when the supply increases, i.e. when more people want to sell it. Look at it from the U.S. perspective. Foreigners want to buy dollars when they:

1. Invest in the U.S.
2. Buy goods and services from the U.S.

At the same time U.S. citizens sell dollars when they:

1. Invest overseas.
2. Buy foreign goods and services.

Holding all else constant, if foreign investment in the U.S. increases, this will create more demand for dollars, and the dollar will appreciate. Similarly, when the U.S. increases its international purchases and investments, that creates additional supply of dollars and the dollar will depreciate.

Several examples

U.S. interest rates increase. That leads to greater foreign investment into the U.S., greater demand for dollars, and dollar appreciation.

New tariffs on U.S. exports to Europe. Now foreigners buy fewer U.S. goods, the demand for dollars declines, and the dollar depreciates.

The U.S. economy is growing rapidly. On one hand, that attracts foreign investment and causes dollar appreciation. On the other hand, U.S. imports increase since Americans can buy more international goods and services and cause dollar depreciation. We are not sure which effect would be stronger but usually a growing economy is associated with an appreciating currency.

Expected appreciation of the dollar. If for some reason investors believe that the dollar will appreciate in one year, they will want to buy it now. This creates additional demand for dollars and leads to appreciation now.

If you wonder what the effect of some macroeconomic variable on the exchange rate is, ask yourself how, holding everything else constant, that variable affects the demand or the supply of the currency. Based on that, you can determine if the change is likely to lead to appreciation or depreciation.

Forecasting currency values: short, medium, and long run

Of course, in reality there are multiple macroeconomic changes occurring at the same time. Interest rates may be changing in various countries, GDP growth rates differ, trade flows shift, etc. The combination of all these factors makes it virtually impossible to predict the exchange rate at short horizons (days, weeks). Too many fundamentals are moving in different directions at the same time. Therefore, economists say that the exchange rate follows a “random walk”, i.e. the best forecast of tomorrow’s exchange rate is today’s exchange rate. The likelihood of appreciation and depreciation are the same.

At medium-term time horizons (months, a few years) the effect of particular macroeconomic fundamentals on the exchange rate becomes more visible. For example, if the economy is growing rapidly its currency is likely to appreciate as the country attracts international capital that creates demand for the local money.

In contrast, in the long-run (many years, decades) macroeconomic fundamentals cease to have a role. Over such long periods of time, the economic growth rates, interest rates, as well as international trade and investment flows have stabilized at some “average” levels. Then, the only determinant of the exchange rate is the rate of money supply growth. Countries that print money more rapidly than the rest of the world will experience currency depreciation. In fact, the size of the depreciation would be equal to the increase of the money supply. Recall that the exchange rate is the price of a currency. If you create too much of it the price will come down.

Exchange rate regimes

Countries may adopt various exchange rate regimes depending how much currency flexibility they want. At one extreme is the pure float, where the exchange rate is determined entirely by market conditions without any intervention by the government. The exchange rate changes in response to changes in the demand and supply. At the other end of the spectrum are fixed exchange rate regimes. The government announces a fixed exchange rate to the dollar, the euro or another currency and intervenes in the currency markets to maintain that value. It will sell domestic currency for foreign currencies to cause depreciation of the domestic money and will buy the domestic currency using its foreign exchange reserves to cause appreciation. These transactions are called “foreign exchange market intervention” and their goal is to keep the exchange rate fixed. In the intermediate case, the government may allow the exchange rate to respond to market conditions and intervene only occasionally to prevent large changes. In that case, the country has a managed floating exchange rate regime.

We can mention a few additional interesting cases. Dollarization is the case when a country adopts the dollar as official money. An example is Ecuador which abandoned its own currency and switched to the dollar. A currency union is a group of several countries that have the same currency. The prime example is the European Monetary Union using the euro. A currency board is a fixed exchange rate regime where the government is obligated by law to maintain very large foreign exchange reserves. Hong Kong has such a policy. The gold standard is a policy where the money in circulation is backed by gold – people can exchange with the government money for gold and gold for money at a fixed rate. That was the prevalent currency policy more than a century ago.

There are very few countries with a pure floating exchange rate regime. Most countries either fix their exchange rates or manage them quite actively. The reason is that, if left to market forces, currency values can change rapidly and create problems. A depreciating currency leads to high inflation as the prices of imported products increase. A fluctuating exchange rate hampers international trade because exporting firms cannot predict what will be their revenue when expressed in local currency. They sell their products in a foreign currency and are interested in its local currency value. For these reasons, governments try to limit the changes in currency values or at least to prevent large changes.

Currency crises

A currency crisis, also called a devaluation crisis or an international financial crisis, is a sharp depreciation of the currency of a country. The depreciation usually comes after a period during which the exchange rate has been very stable, even fixed. For example, in 1994, one dollar could buy about 3 Mexican peso and by the end of 1995 one dollar bought more than 6 peso. The value of the peso declined in half. That is a currency crisis. Another example is the devaluation of the Indonesian rupiah in 1997/98. The value of the rupiah relative to the dollar declined three times.

The inflation produced by the devaluation creates uncertainty and often leads to political unrest as people cannot afford food and other items. Because of that uncertainty, many businesses scale down their investments and their production and the economy slows down. In addition, in a typical emerging market economy, many of the businesses have debt denominated in dollars. When the local currency depreciates, these debts become very expensive to service. The firms collect revenue from sales in local currency but they have to service debt in the much more expensive foreign currency. Some businesses don't make it and close down.

Eventually, the positive effect of the devaluation kicks in. The products made for export are now much cheaper on the international markets because the domestic currency is cheaper. That makes them more competitive. Exports increase and the economy recovers. So, even the worst of crises have an end.

There are three main theories that explain currency crises. They are called the first, second, and third generation models of currency crises due to the timing of their development.

- The first generation model was developed in the late 1970’s and attributes crises to fundamental policy problems. The government runs budget deficits and prints money to finance them. That leads to high inflation and lower competitiveness of the exporters. A large trade deficit emerges. Eventually the currency has to depreciate to restore international competitiveness.

- The second generation model came into being during the 80’s. In that model, the fundamentals of the economy are relatively fine but a speculative attack may trigger a crisis. Speculators start selling a currency to take their investments out of the country. To stop them, the central bank raises interest rates in an effort to make domestic investments more attractive. However, the high interest rates hurt consumers and businesses that have taken credit. Eventually, the government lowers the interest rates to help them but the currency depreciates.

- The third generation model was developed in response to the Asian financial crisis of 1997. Here too the fundamental of the economy are fine but the country cannot pay its international debts. It has to borrow new money to pay back its old debts. If, however, investors are not willing to lend new money, then the country experiences a “liquidity crisis” and the currency depreciates.

Each of these models can explain different crises. However, it is very difficult to put the correct diagnosis on an unfolding crisis: is it a first, second or third generation type or a mix? Too many things are happening very fast: the currency is plummeting, the government is in disarray, prices are increasing rapidly, the economy is contracting. There is much disagreement about the appropriate response to the crisis. In a few years, then the dust settles down, one can better assess what exactly happened.

Additional resources

Information about the European Monetary Union with a lot of historic information, analyses and data. Available from: European Central Bank

The International Monetary Fund, a wealth of information about all member countries and about international financial markets. Available from: IMF