James Chen, CMT is an expert trader, investment adviser, and global market strategist. He has authored books on technical analysis and foreign exchange trading published by John Wiley and Sons and served as a guest expert on CNBC, BloombergTV, Forbes, and Reuters among other financial media." data-inline-tooltip="true">James Chen

Gordon Scott has been an active investor and technical analyst of securities, futures, forex, and penny stocks for 20+ years. He is a member of the les-grizzlys-catalans.org Financial Review Board and the co-author of Investing to Win. Gordon is a Chartered Market Technician (CMT). He is also a member of CMT Association.

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What Is Exchange Rate

An exchange rate is the value of one nation"s currency versus the currency of another nation or economic zone. For example, how many U.S. dollars does it take to buy one euro? As of September 24, 2021, the exchange rate is 1.1720, meaning it takes $1.1720 to buy €1.

An exchange rate is the value of a country's currency vs. that of another country or economic zone.Most exchange rates are free-floating and will rise or fall based on supply and demand in the market.Some exchange rates are not free-floating and are pegged to the value of other currencies and may have restrictions.

Understanding Exchange Rate

Typically, an exchange rate is quoted using an acronym for the national currency it represents. For example, the acronym USD represents the U.S. dollar, while EUR represents the euro.To quote the currency pair for the dollar and the euro, it would be EUR/USD. In the case of the Japanese yen, it"s USD/JPY, or dollar to yen. An exchange rate of 100 would mean that 1 dollar equals 100 yen.

Typically, exchange rates can be free-floating or fixed. A free-floating exchange rate rises and falls due to changes in the foreign exchange market.A fixed exchange rate is pegged to the value of another currency. For instance, the Hong Kong dollar is pegged to the U.S. dollar in a range of 7.75 to 7.85. This means the value of the Hong Kong dollar to the U.S. dollar will remain within this range.

Exchange rates can have what is called a spot rate, or cash value, which is the current market value. Alternatively, an exchange rate may have a forward value, which is based on expectations for the currency to rise or fall versus its spot price.

Forward rate values may fluctuate due to changes in expectations for future interest rates in one country versus another. For example, let"s say that traders have the view that the eurozone will ease monetary policy versus the U.S. In this case, traders could buy the dollar versus the euro, resulting in the value of the euro falling.

Exchange rates can also be different for the same country. Some countries have restricted currencies, limiting their exchange to within the countries' borders. In some cases, there is an onshore rate and an offshore rate. Generally, a more favorable exchange rate can often be found within a country's border versus outside its borders. Also, a restricted currency can have its value set by the government.

China is one major example of a country that has this rate structure. Additionally, China's yuan is a currency that is controlled by the government. Every day, the Chinese government sets a midpoint value for the currency, allowing the yuan to trade in a band of 2% from the midpoint.

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Exchange Rate Example

John is traveling to Germany from his home in New York and he wants to make sure he has 200 dollars’ worth of euros when he arrives in Germany. He goes to the local currency exchange shop and sees that the current exchange rate is 1.20. It means if he exchanges $200, he will get €166.66 in return.