AboutEric Hofer Expertise General questions about bringing American and British business models/ideas to Europe and CIS (former soviet countries).
Experience My main area of expertise is in IT, Consulting and Fast-Moving Consumer Goods (FMCG). I've worked in the US, UK, Denmark, France, Spain, Hungary, Czech Republic, the Philippines, Poland, Azerbaijan, Serbia, Saudi, Slovakia, Switzerland, Germany, Turkey and Greece. My background is in company start up (soft drinks, snack foods, distribution, real estate management and wireless services), IT processes, outsourcing IT, etc.
Publications Budapest Sun
Education/Credentials BA from SUNY Purchase, New York.
Graduate work at NYU, Courant Institute of Mathematics.
Past/Present clients Pepsi, British Telecom, Pernod-Ricard, Digital, Chase Manhattan Bank, British Steel, Matutano, General Bottlers, PepsiAmericas, A&P doo, Frito-Lays, Britvic, Dataserv, AT&T, Kidder Peabody
Expert: Eric Hofer Date: 3/11/2008 Subject: Currency exchange rates
Question Who sets currency exchange rates?Can answer include a name?
Answer Interesting preconception that there's actually a "single person" making all the decisions... Reminds me of a news item a few years back about a guy named El Nino who kept getting phone calls to stop affecting the weather along the US's West Coast.
The truth is, there's no 1 person. It's akin to saying there's no 1 cell that makes you you. Its a collective. In a collective there are 1000s of people (so lots of "names" with no 1 individual more important than the others) all going about their business; and their business in this case is exchanging money.
Because of the scale, the major rate setters are large institutions - such as banks and brokerage houses that are being asked to support activity of their front-line to translate one currency to another. To make the exchange they actually have to find people on the opposite side who need funds. These institutions are matching up the 2. When there are funds on 1 side chasing after a lesser amount on the other side, the price goes up; likewise, the reverse also happens and the price goes down.
The exchange of currency is also based upon history and local economic situation (e.g. inflation, GDP, budget deficit, bond and interest rates). These influence people's confidence in a currency, attract deposits or flight and drive larger systemic imbalances making a currency more or less attractive. When presented with large amounts to exchange, for example, huge construction projects, development aid, company purchases, etc which appear in a single tranche, there might not be enough in the pool of money going in the reverse direction as these might consist of smaller bundles like the sales of raw materials, finished goods, repatriation of profits, and satisfying tourists and ex-pat payroll.
Aside from the immediate part of this matching process, there is also a planning aspect. For big transactions, businesses look to lock the currency rates by finding somebody who'll guarantee the rate. Again no name specific, but there are companies (brokerage houses, futures traders, etc - like PIMCO).
Lastly, as I'm finding in my own case personally, eventually the rates look so unattractive - one doesn't do the deal - and like all Supply & Demand systems, leads to a drop in the demand, increase in supply and (I hope in my case) a fall in the price.
I hope this helps to understand the basic mechanics and that there's not some omniscent person calling the shots; but rather a concept of "pricing" and "what the market will bear."
E.
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PS. A fellow economist passed me a book recently that you might find interesting which describes what's going on here and though not specifically about rates, is very clear about the basic mechanisms at play here. It's "The Undercover Economist" by Tim Harford. Harford pointed out also that currency, exports and imports is not just between the 2 currencies being traded, but is also a circle involving many countries (Saudi to Germany to the US, etc.); and that countries have to both export and import, otherwise there's no trade - and nothing for which people will exchange currency (or anything else for that matter).
Anyway, it's a fairly fast read and opens up a subject that few people usually get turned on to.
