Exchange rate
An exchange rate is the price of one currency expressed in terms of another.
The price of one country's money in terms of another's quietly shapes trade, inflation, and the value of everything that crosses a border. That is the exchange rate.
An exchange rate is the price of one currency expressed in terms of another, the rate at which one money can be converted into another. It is among the most important prices in an open economy, influencing trade, inflation, investment, and the real value of incomes and debts.
Floating and fixed
Currencies are managed in different ways. A floating exchange rate is set by supply and demand in the currency markets and moves freely, while a fixed rate is pegged by the government or central bank to another currency or a basket, and defended through intervention. Many regimes sit between the two, with authorities allowing movement within limits or leaning against it. The choice involves a trade-off between the stability a peg can offer and the flexibility and independent monetary policy a float allows.
What moves it
A floating rate is driven by anything that changes the relative demand for currencies: differences in interest rates, which attract or repel capital; relative inflation, which erodes a currency's value; trade flows; and, powerfully, expectations and sentiment, since currencies are also financial assets traded on views about the future. This makes exchange rates volatile and hard to predict, often moving far more than underlying fundamentals seem to justify.
Why it matters
The exchange rate has pervasive effects. A weaker currency makes a country's exports cheaper and imports dearer, which can boost competitiveness but also raise inflation by lifting the cost of imported goods. A stronger currency does the reverse. Movements redistribute between exporters and importers, and between borrowers and lenders in foreign currency, and can destabilise economies that have borrowed heavily abroad. Few prices reach into so many corners of economic life.
The exchange rate is the hinge between a national economy and the world, translating domestic conditions into international competitiveness and foreign conditions into domestic prices. Its volatility and reach make it both a powerful adjustment mechanism and a recurring source of crisis, which is why how to manage it remains one of the central questions of international economics.