The exchange rate is the value of one currency in terms of another currency.
It is very important in international trade and the movement of people between different countries as money from one country must be converted into the money of another so that transactions can take place.
Most exchange rates are floating. This means they are constantly changing and the value of a currency depends on the actions of consumers, businesses, and governments, which in turn affect how much of the currency is demanded. Just like any good or service, if demand for a currency increases its value will increase and vice versa.
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Key terms:
Exchange rate appreciation – where the value of one currency increases in relation to another.
Exchange rate depreciation – where the value of one currency decreases in relation to another.