Exchange Rate

If one euro can be exchanged for 1.10 US dollars, the euro-dollar exchange rate is 1.10. Exchange rates are needed whenever people trade, travel or invest across borders.

Most major currencies have floating exchange rates, which change constantly based on supply and demand in currency markets. These are influenced by interest rates, inflation, economic growth, trade flows, investment flows, political events and market expectations. Some countries fix or manage their exchange rate against another currency, using their central bank's reserves to keep it stable.

When a currency rises in value, it is said to appreciate; when it falls, it depreciates. Suppose the euro strengthens from 1.10 to 1.20 dollars. A European tourist in the United States gets more dollars for each euro, so travel becomes cheaper. But European exports become more expensive for American buyers, which may reduce sales.

Exchange rates matter for businesses that import or export, for investors holding foreign assets and for inflation, because a weaker currency makes imported goods more expensive. Companies often use financial contracts, such as forward contracts, to protect themselves against unfavourable exchange rate movements.