Q&A - What is an exchange rate?
Friday, May 01, 2009
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An exchange rate is the price of one currency expressed in terms of another currency.
The exchange rate determines how much of one currency has to be given up in order to buy a specific amount of another currency.
For example, look at the exchange rates in the following table:
In the table above, you can see that in May, £1 would buy $1.60, if you wanted to convert some pounds into US dollars. Alternatively, £1 would buy €1.15 euro.
Exchange rates change constantly as currencies are bought and sold (traded) on the global currency markets. Let any commodity, a currency has a value or price expressed in terms of what it could buy – that is the exchange rate.
Look at the table and see what happened to the exchange rate for the pound between May and September.
The value of £1 fell against both the US dollar and the Euro. For example, by September, £1 would only buy you $1.45, a fall of $0.15 from May.
That means that the pound weakened against the dollar (and the euro).
Putting it another way, the value of the US dollar strengthened against the pound. If you were holding dollars, you would need less of them to convert into £1.
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