Exchange Rate
The price at which one country's currency can be exchanged for another's.
What is Exchange Rate?
An exchange rate is the value of one currency expressed in terms of another — for example, how many US dollars one euro can buy. Exchange rates are set by foreign exchange (forex) markets, the largest and most liquid financial markets in the world, with over $7 trillion in daily trading. Rates fluctuate based on interest rate differentials, inflation, trade balances, political stability, and market sentiment. A stronger currency makes imports cheaper but reduces export competitiveness; a weaker currency does the opposite. Central banks sometimes intervene in forex markets to influence their currency's value.
Example
When the US Federal Reserve raised interest rates sharply in 2022, the US dollar strengthened to a 20-year high against a basket of currencies. The EUR/USD rate fell below 1.00 for the first time since 2002, making European exports cheaper in dollar terms but raising costs for EU importers of dollar-priced commodities like oil.