Glossary
Exchange rate
The price of one currency in terms of another, set in the forex market or managed by a central bank.
An exchange rate is how much of one currency it takes to buy one unit of another. It is quoted as a currency pair: EUR/USD at 1.08 means one euro costs 1.08 US dollars. Exchange rates touch investors even if they never trade currencies, because they change the dollar value of foreign stocks, the profits US multinationals report and the prices of imported goods.
Reading and converting
The first currency in a pair is the base and the second is the quote. A rise in EUR/USD means the euro strengthened against the dollar.
Banks and brokers quote a bid and an ask around the mid rate, and retail conversions often carry a markup, so the rate you get is rarely the headline number.
What moves exchange rates
- Interest-rate differences. Higher expected yields tend to attract capital into a currency.
- Inflation. Over long periods, currencies of high-inflation countries tend to weaken.
- Trade and capital flows, risk appetite and central-bank intervention.
Floating versus managed
Most major currencies float, with prices set continuously in the foreign exchange market. Others are managed or pegged. The Hong Kong dollar, for instance, is held within a band of 7.75 to 7.85 per US dollar by its monetary authority. A peg reduces day-to-day swings but can break suddenly if reserves run short.