ABSTRACT
International trade requires the use of exchange rates, as different countries have different currencies. An exchange rate is the rate at which currencies are traded. The foreign exchange market enables producers or consumers to exchange currencies so that trade can take place. From a purely financial perspective, the nominal exchange rate is an important policy variable as it is the price at which currencies are transacted. Adjustment by market-driven appreciation or depreciation of the nominal exchange rate obtained by equalizing unfettered private supply and demand for foreign currency. In a flexible exchange rate regime, the nominal exchange rate is an equilibrium price that balances supply and demand. Countries under a fixed exchange rate regime and experiencing an overvalued currency will periodically need to devalue their currency, in particular as induced by a balance-of-trade crisis in which they run out of foreign exchange to support essential imports of food, capital, and intermediate goods.
