Explain currency exchange rates?

Question

Explain currency exchange rates?

Answer 1

Each currency has a price in terms of all other currencies.  This is called the exchange rate.  Every currency has multiple exchange rates.

For each currency, there is a supply and demand.  This comes from the trade flows of each country.  Say that an American imports a $20000 car from Japan.  To do this, the dollars need to be converted from dollars to yen.  So the American offers $20000 in the exchange market (increasing supply of dollars) and demands a certain amount of yen, increasing the demand for yen.  Because the supply of dollars increases, the price of dollars goes down, and because the demand for yen increases, the price goes up.  

Because this transaction is small compared to the volume of currency exchanges, the effect on the price will be very small, so the person basically pays the predetermined exchange rate.  However, these types of transactions en masse determine what the exchange rate is.