How are exchange rates set?

A currency’s exchange rate against another currency will depend on the exchange rate system of the country or group of countries in question. There are two different exchange rate regimes: fixed and flexible. In fixed-rate regimes, the central bank sets an exchange rate and commits to maintaining it at a certain level through its monetary policy (primarily its interest rates). In flexible exchange rate regimes, the central bank lets the currency fluctuate freely in the market and this allows it to set its interest rates as it sees fit to pursue other objectives, such as price stability. In this latter case, the value of the currency is determined by supply and demand.

The euro area has adopted a flexible exchange rate system with respect to other international currencies.