Exchange rates determine how much one currency is worth relative to another. Understanding how they work is essential for international business, travel, and finance.
What Is an Exchange Rate
An exchange rate is the price of one currency expressed in terms of another. EUR/USD = 1.10 means 1 Euro equals 1.10 US Dollars. USD/JPY = 150 means 1 Dollar equals 150 Yen. The first currency (base) is always 1 unit, and the second (quote) shows how many units it equals.
Types of Exchange Rates
Floating rates are determined by supply and demand (USD, EUR, GBP, JPY). Fixed/pegged rates are maintained by governments against another currency (Hong Kong Dollar to USD). Managed float currencies are primarily market-determined with occasional central bank intervention (many emerging markets).
Reading Currency Quotes
In EUR/USD = 1.10, EUR is the base currency (1 unit) and USD is the quote currency (1.10 units). The bid/ask spread shows dealer profit: bid is what dealers pay to buy, ask is what they charge to sell. A quote of 1.0995/1.1005 has a 10 pip spread.
Major Currency Pairs
The most traded pairs have nicknames: EUR/USD (Euro Dollar), USD/JPY (Dollar Yen), GBP/USD (Cable), USD/CHF (Swissie), AUD/USD (Aussie), USD/CAD (Loonie). When EUR/USD rises from 1.10 to 1.15, the Euro appreciated (worth more dollars). When USD/JPY falls from 150 to 145, the Dollar depreciated (buys fewer yen).