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11 Dec

You probably hear the financial reporter on the nightly news say something like “the Kenyan shilling fell against the pound today”, but what does that mean?

I, being the average citizen, am clueless when it comes to matters of money, so I have no idea what exactly affects the exchange rates and the value of currencies in the world.

National currencies are not always accepted in another country, so an exchange rate allows you to buy a different currency to allow you to trade in that country.

In lay man terms, a currency is worth whatever buyers are willing to pay for it. This is determined by supply and demand, which is in turn driven by foreign investment, import/export ratios, inflation, and a host of other economic factors. This is known as a floating currency.

A pegged, or fixed system on the other hand, is one in which the exchange rate is set and artificially maintained by the government. The rate will be pegged to some other country’s dollar, usually the U.S. dollar. The rate will thus not fluctuate from day to day.

A floating currency is suitable for countries with mature, stable markets whilst the fixed currency is perfect for countries that have immature potentially unstable economies.

 
 

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