What is Exchange Rate?
An exchange rate is the price of one country's currency expressed in terms of another country's currency.
Exchange rates determine how much of one currency you need to buy a unit of another. They are quoted in pairs, such as GBP/USD (British Pound vs. US Dollar). In a floating exchange rate system, which most major economies use, the value is determined by supply and demand forces in the global forex market.
Key factors influencing exchange rates include interest rate differentials (set by central banks like the Federal Reserve), relative inflation rates, a country's trade balance, political stability, and overall economic performance. A stronger currency makes imports cheaper but can hurt exporters.
ExampleIf the GBP/USD exchange rate is 1.25, it means one British Pound can be exchanged for 1.25 US Dollars. A UK company importing goods priced in USD would need fewer pounds if this rate rises (e.g., to 1.30).