How do exchange rates happen?
Where do currencies go when they are left to find their own levels? No one knows exactly. You would think with all these economists and computers around there would be an exact explanation. But there you are. Of course, as with any price set by the markets, the key factors are supply and demand.
Logically, you would expect that if you can go shopping in any country, you will choose to buy from the one with the lowest prices. Demand for that nation’s cash, to acquire its goods and services, will push up its currency rate until its price advantages are eroded. To quantify this, and look at it from another angle, if US inflation is 4% and Canadian inflation is 3%, the US dollar will have to fall by 1% to restore purchasing ...
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