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The exchange rate of a country in basic terms is the price of the country’s currency in terms of another currency; it is the rate at which one currency can be exchanged for another. The use of the exchange rate can be seen as a value mechanism for currencies on the international market (Froot and Stein, 1991). The history and development of the exchange rate can be traced to the emergence of national currencies since it facilitated trade between countries. The earliest most structured exchange rate system was the gold standard during the nineteenth century where currencies were converted into their respective gold value. After the collapse of the gold standard in 1914, the Bretton Woods Agreement (BWA) was signed which developed a system where all currencies were pegged to the U.S. dollar. By 1970 the BWA was already under threat from excessive supply of the U.S. dollar leading to its collapse in 1971. The Smithsonian Agreement which came into effect in 1971 under the Nixon led U.S. government lead to the determination of the exchange rates by market forces giving birth to the Floating system.
In present times there exists three main exchange rate regimes these include the Free-floating regime where exchange rates are determined by demand and supply forces. The second regime is the pegged or fixed exchange rate regime where the exchange rate is not allowed to fluctuate by government authority. The hybrid regime is a mixture of the fixed and free floating where the exchange rate is allowed to float within a specific range determined by the Central Bank.
The exchange rate market is a multi-Trillion-dollar market that is estimated by the Bank of International Settlement to have a daily turnover of over 4 trillion U.S. dollars. These estimations make the exchange rate market the largest asset class in trade volume.
The exchange value of a currency affects every part of a nation’s economy. Giving its importance and significance to international trade and national growth, many attempts have been made to predict future exchange rates by economic players in order to make profits or design economic policies. Many Economic models have been developed from the start of the Smithsonian agreement to try and predic
