It’s amazing how currency and its value differ from one country to another country. I am really curious how exchange rate works and I’ve been enlightened about it to some point. We know that different countries uses different currencies, for example Philippines have Philippine peso, USA have the US dollars, European countries have Euro, Malaysia have Ringgit, Indonesia have Rupiah, Pakistan have Taka, Japan have Yen, etc. Each of the currency have different value, and if you are in a particular country, you have to change your money with its particular currency so you can buy something.  Currency value is highly determined by market forces.

Currency’s exchange rate are determined by two main systems namely, floating currency and pegged currency. Floating exchange rate is based on supply and demand, which is driven by foreign investment, import/export ratios, inflation, and a host of other economic factors. This system is used by major nations with mature and stable economic markets such as USA, Canada, and Great Britain. Pegged exchange rate, also known as fixed system is a exchange rate set and artificially maintained by the government against another country’s currency so that local currency does not fluctuate.  It means, the government has to keep the pegged rate stable.  The national bank of the governemt has to hold large foreign currency reserve to lessen the effect of changes in supply and demand.  Developing countries use this system to prevent out-of-control inflation.

Different countries use exchange rate system. In the case of the Philippines, i think, it uses pegged system against the US dollar.