Currency conversion is the ratio between the two currencies used in the foreign exchange markets, which indicates how much one currency needs to be exchanged for the equivalent value of another currency. Conversion rates change regularly for all currencies traded in the foreign exchange markets.
Currency conversion shows how much one currency is needed to buy goods in another currency. It is equivalent to exchange rates and spot prices in the Forex market.
The conversion rates of a particular currency are affected by relative supply and demand. In addition, central banks and national governments have adopted appropriate response policies to influence supply and demand.
The conversion rate determines how many people need units of one currency to get the desired amount in another currency. For example, if a buyer has US dollars and wants to buy a car owned by a seller in Germany, he may have to pay for the car in euros. If the price is indicated as 20,000 euros and the conversion rate is 1.2, then the buyer knows that he needs at least 24,000 US dollars (20,000 x 1.2 dollars) to purchase 20,000 euros and, accordingly, get the desired car.
Since the exchange rate is the price of one currency expressed in another, it also reflects the relative supply and demand for each currency. Demand and supply are often based on the overall economy of a country, the interest rate or monetary policy of the government.
If the supply of affordable currency grows more than the number of consumers or investors who require its use, then the value of this currency falls, because it becomes less attractive in foreign exchange markets.
The government or central bank can take steps to increase or decrease the country's money supply as part of its efforts to regulate the conversion rate of its currency. This can be done by order of the government of the country for reasons of economic incentives or austerity policies, but changes in the money supply are the part that central banks can always control.
Demand for the foreign currency may also change. One of the factors affecting demand is the country's interest rate policy. If the prevailing interest rate for the currency increases, the demand for the currency may also increase. Individuals and organizations may prefer to store assets in this currency rather than in others. Other factors that may lead to conversion fluctuations include the trade balance, perceived inflation risk, and political stability.
Currency Conversion in Action
The conversion rate is the relative value between the two currencies. In fact, it is a measure of the price of one currency against another. When the exchange rate changes, the money of one country may become weaker or stronger in relation to other currencies. For example, if the rate of the euro against the US dollar (EURUSD) is 1.25, then this means that one euro equals 1.25 US dollars. Or if the US dollar rates to the Indian rupee at 65.2, then one US dollar is worth 65.2 Indian rupees.