Forex Exchange Rate about Yen and Dollar 

forex exchange rates

Forex exchange rate index is intended to calculate how movements in the dollar will have an effect on U.S. exports and imports. Forex index must also take account of any differences between the rates of inflation in other countries and the rate of inflation in the United States. Suppose that the rate of inflation were only 3 percent a year in Germany but 10 percent a year in the United States. In a year, the buying power of the dollar in the United States more fast 7 percent than the buying power of the German mark. 

Now suppose that Forex exchange rate of the dollar declined by 7 percent from one year to the next against the mark. This means that, the relative prices of U.S. imports (from Germany) and U.S. exports (to Germany) do not change when a change in Forex exchange rate simply compensates for differences in inflation rates. 

Readers let us notify: international Forex trade economists do it differently. The dollar buys more foreign currency the dollar has appreciated when Forex exchange as we have defined it goes up (e.g., from 100 yen to 120 yen). The dollar buys less foreign currency the dollar has depreciated when Forex exchange rate goes down (e.g., from 100 yen to 90 yen. 

Unluckily, this approach is the opposite of the concept that international trade economists focus on when they explain Forex foreign-exchange markets. The yen to dollar exchange rate is the cost of purchasing one yen with dollars after they identify Forex exchange rate in terms of the price of foreign exchange. The inverse would be $0,01 (one cent) per yen if Forex exchange rate in our terms is equal to 100 yen to the dollar. If the dollar appreciate, from 100 yen to 120 yen to the dollar (dollar purchases more yen), then Forex exchange rate, expressed as the cost of yen, declines in dollar terms, in this example dropping from $0,01 to $0,0083. 

The appreciating dollar means that their definition of the Forex dollar-exchange rate falls when the dollar appreciates! But it also means that yen purchased in foreign exchange Forex markets are now cheaper to buy with dollars, exactly the concept that trade economists wish to show. This is very confusing and so we define Forex exchange rate as yen per dollar, rather than dollars per yen. 

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