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What is a Currency Exchange Rate?

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  • Written By: Eric Tallberg
  • Edited By: Bronwyn Harris
  • Last Modified Date: 15 September 2016
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The foreign exchange currency market is the largest financial market on the planet. Basically, a consortium of world banks, this consortium/market sets the currency exchange rate, known variously as the foreign exchange rate, the FOREX rate. The currency exchange rate is, in its most elementary terms, how much one nation’s currency is worth in comparison to all other national currencies.

Currency is, of course, money. The currency exchange rate establishes how much for example, one dollar of United States money is worth in Japanese money, known as yen. In this particular case, the quoted rate, the official worth of one United States dollar (USD) is 102 Japanese yen (JPY). This is the quoted currency exchange rate between the USD and the JPY, and is known as the “spot rate,” the rate of exchange right at the moment. Occasionally, the rate might be quoted as the “forward exchange,” an exchange rate that’s traded today, but actual payment is delayed until a specified future date.

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A number of factors will influence a currency exchange rate. For example, when the Eurodollar, or Euro (EUR), was introduced into the world’s economic and financial markets, the exchange rate of Euros to all other currencies, a whole new rate had to be determined based on the Eurodollar. China’s yuan renminbi (RMB), currently thought to be artificially deflated, and essentially propped up by the USD, will eventually be re-rated to adjust for its actual inflated nature, causing further rearrangements in currency exchange rates.

The currency of several nations is called free-floating. This means its currency exchange rate against all other currencies varies daily. In some rare cases, it can vary hourly. Several factors may cause a given currency to become free-floating, including an unstable government, national disaster, the fluctuating worth of a particular country’s goods on the world market, variances in worth of the currency base, etc.

There are a number of websites on the Internet that will allow a user to determine the currency exchange rates between any major currency denominations using their interactive currency calculator. It’s a simple matter of finding a site and, after determining if the site has the particular currencies desired, clicking on one national currency, and then another other for the current exchange rate for those chosen currencies. It should be noted that the rates quoted on these currency exchange websites are not, as a rule, the official foreign exchange market rates. They are the rates used by the particular bank or banks with which these sites are affiliated. In general, however, the difference will be negligible.

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jacksonmk
Post 2

When you travel outside your own country you may need to exchange your currency for that of another country.

Since currency exchange rates vary from place to place and day to day, where and how you exchange currency can make a difference in your wallet.

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