Where did these exchange rates come from? Have they always been used in relation to foreign currencies? How did they evolve along the years?
If you wonder about these things, the first thing you should know is that the exchange rates havent been used since the beginning of trade. Gold was the thing used to back the currencies for a very long time. What did this mean? It meant that a currency issued by a government represented a certain amount of gold that existed in that governments vaults. The fact that a person owned that currency meant that person really owned a certain amount of gold.
But this balance was about to be changed as the US government set the value of the dollar at a unique level: 35 dollars would buy you one ounce of gold. This thing happened in the 1930s. After the end of the Second World War, countries started to consider the US dollar a strong basis for their currencies. The reason for doing this was the fact that the US dollar value was well known, so a currency based on the dollar would actually be based on gold. For instance, if a certain currency was worth three times more gold than the US dollar, then it actually worth three US dollars.
But this system became outdated quite fast due to the amazing evolution of the world economy. The US dollar started to be affected by inflation, meaning that it could purchase less and less goods. This wouldnt have been very bad if other currencies hadnt become stronger and more stable than the US dollar. In the end, the US dollar had to accept its fate that it had stopped being the as strong as it thought, so its value was decreased from 35 dollars for one ounce of gold, to 70 dollars for one ounce of gold.
In the 70s the US dollar gave up on its gold standard. The US dollar value started to be determined by its market strength. Although the US dollar stopped being the standard for world currencies, it never stopped being the most important currency on financial markets, as many exchange rates are still expressed in US dollars. The Euro has also become a strong currency, even stronger than the US dollar. These two currencies together represent about 50 percent of the exchange rates.
In conclusion, the exchange rates have evolved from being expressed in gold, to being expressed in US dollars, and finally, they worth as much as they weight on the market.
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