Fixed Exchange Rates
There are two ways the price of a currency can be determined against another. A fixed, or pegged, rate is a rate the government (central bank) sets and maintains as the official exchange rate. A set price will be determined against a major world currency (usually the U.S. dollar, but also other major currencies such as the euro, the yen or a basket of currencies). In order to maintain the local exchange rate, the central bank buys and sells its own currency on the foreign exchange market in return for the currency to which it is pegged. (To learn more, read What Are Central Banks? and Get To Know The Major Central Banks.)

If, for example, it is determined that the value of a single unit of local currency is equal to US$3, the central bank will have to ensure that it can supply the market with those dollars. In order to maintain the rate, the central bank must keep a high level of foreign reserves. This is a reserved amount of foreign currency held by the central bank that it can use to release (or absorb) extra funds into (or out of) the market. This ensures an appropriate money supply, appropriate fluctuations in the market (inflation/deflation), and ultimately, the exchange rate. The central bank can also adjust the official exchange rate when necessary.

Floating Exchange Rates
Unlike the fixed rate, a floating exchange rate is determined by the private market through supply and demand. A floating rate is often termed “self-correcting”, as any differences in supply and demand will automatically be corrected in the market. Take a look at this simplified model: if demand for a currency is low, its value will decrease, thus making imported goods more expensive and stimulating demand for local goods and services. This in turn will generate more jobs, causing an auto-correction in the market. A floating exchange rate is constantly changing.

In reality, no currency is wholly fixed or floating. In a fixed regime, market pressures can also influence changes in the exchange rate. Sometimes, when a local currency does reflect its true value against its pegged currency, a “black market”, which is more reflective of actual supply and demand, may develop. A central bank will often then be forced to revalue or devalue the official rate so that the rate is in line with the unofficial one, thereby halting the activity of the black market.

In a floating regime, the central bank may also intervene when it is necessary to ensure stability and to avoid inflation; however, it is less often that the central bank of a floating regime will interfere.

Suncor Energy Inc., Canada’s biggest energy company, gained 3.1 percent as crude oil futures reached their highest point this year. Teck Resources Ltd. advanced 1.7 percent as zinc and copper climbed. Barrick Gold Corp., the world’s largest gold producer, added 1.6 percent.
“The market’s tone is driven by improving economic data, specifically in Europe,” said Andrew McCreath, a portfolio manager at Sentry Select Capital Corp. in Toronto, which manages about C$4 billion. “The world is back to thinking that it’s synchronous growth; if one guy improves, the other guy’s going to improve.”

The Standard & Poor’s/TSX Composite Index advanced 130.67 points, or 1.2 percent, to 10,831.18. The equity benchmark has risen 21 percent this year as commodity prices rebounded on signs the global economy is recovering from the first simultaneous recessions in the U.S., Europe and Japan since World War II.

Oil climbed to a 10 month high today as the euro strengthened against the dollar after German services and French manufacturing expanded in August, bolstering the appeal of commodities to investors.

Record Increase

Sales of existing U.S. homes rose 7.2 percent to a 5.24 million annual rate, the highest since August 2007, the National Association of Realtors said in Washington. The gain was the biggest since records began in 1999.

Crude oil for October delivery increased 1.3 percent to $73.89 a barrel in New York.

Suncor gained 3.1 percent to C$35.53 to contribute the most to the S&P/TSX’s rally. Petrobank Energy and Resources Ltd. led energy companies with a 6.9 percent surge to C$40.29, its highest price since September.

The weakening U.S. dollar boosted gold prices, which tend to rise as the U.S. dollar falls. Gold futures for December delivery climbed 1.4 percent to $954.70 an ounce in New York.

Barrick added 1.6 percent to C$37.60, for a weekly gain of 0.6 percent. The second-largest gold producer, Goldcorp Inc., rose 1.2 percent to C$38.84. Kinross Gold Corp. jumped 2.5 percent to C$20.99.

Silver Producers

Silver Wheaton Corp., Pan American Silver Corp. and Silver Standard Resources Inc. each gained at least 2.8 percent as silver for September delivery increased 2.1 percent in New York.

Copper for December delivery gained 5.1 percent to $2.89 a pound in New York, while zinc, nickel and lead rose in London.

Teck Resources, Canada’s largest base-metals producer, rallied 1.7 percent to C$28.88. Equinox Minerals Ltd., which mines copper in Zambia, climbed 2.3 percent to C$2.66.

“The weaker U.S. dollar decreases the price of commodities for buyers of commodities outside the United States,” McCreath said. “There’s a belief that it has a tendency to increase demand, and as a result commodity prices go up.”

Energy and raw-materials companies make up 43 percent of the value of the TSX.

Economic Prospects

Shortly after trading began, U.S. Federal Reserve Chairman Ben S. Bernanke told a symposium that “the prospects for a return to growth in the near term appear good” both in the U.S. and internationally.

“We’ve got some good news from Germany, we’ve got some good news from France, we’ve got Bernanke saying the recession is over,” said Steven Conville, a Markham, Ontario-based portfolio manager at Blackmont Capital Inc., which manages about C$8 billion. With real-estate sales improving “from abysmal to horrible that makes for, on light volume, a positive buying day,” he said.

The S&P/TSX pared its losses for the week to 0.2 percent. The index dropped 316.42 points Aug. 17 after foreign direct investment in China fell and Japan’s economy grew less than economists estimated.

Contract manufacturer Celestica Inc. led the S&P/TSX with an 8 percent gain to C$9.60, its highest price since May 2008, after Citigroup increased its rating on the stock to “hold” from “sell.”

Only three stocks on the S&P/TSX lost more than 2 percent. New Gold Inc. plunged 5.8 percent to C$3.77, after a 5.8 percent gain from yesterday. The company said it would sell 26.7 million shares for C$3.75 apiece. New Gold had 356 million shares outstanding as of July 31.

Pharmaceutical-services company Patheon Inc. soared 31 percent to a 10-month high of C$3.38 after receiving an $460 million buyout offer from Lonza Group AG of Switzerland. Mississauga, Ontario-based Patheon isn’t on the S&P/TSX index.