Learn what an exchange rate is, how currency quotes work, and why rates move with inflation, interest-rate expectations, trade, and risk sentiment.
An exchange rate is the price of one currency expressed in another currency.
If EUR/USD = 1.10, one euro buys 1.10 U.S. dollars.
Exchange rates affect:
That is why exchange rates matter not only to currency traders but also to multinational companies, bond investors, equity analysts, and central banks.
A currency quote usually has two sides:
In USD/JPY, the base currency is the U.S. dollar and the quote currency is the Japanese yen.
If USD/JPY = 150, one U.S. dollar buys 150 yen.
Exchange rates are influenced by many forces, including:
Currency values often move less because of current conditions alone and more because of how those conditions compare with another country.
When a currency buys more of another currency, it has appreciated.
When it buys less, it has depreciated.
These moves can help one part of the economy while hurting another. A weaker domestic currency may support exporters but raise import costs and inflation pressure.
Suppose a Canadian investor buys a U.S. stock.
If the stock rises 5% in U.S. dollars but the U.S. dollar falls 4% against the Canadian dollar, the investor’s home-currency gain may be much smaller than the stock return alone suggests.
That is why exchange-rate risk matters for international investing.
Relative policy expectations matter a lot.
If one central bank is expected to keep rates higher than another, its currency may strengthen because investors can earn better short-term returns holding that currency.
But this relationship is not mechanical. Risk appetite, fiscal concerns, and external balances can change the story.