Exchange rate is the price of one currency in another currency. Exchange rate is also known as the rate of exchange or currency exchange rate or foreign exchange rate.
Exchange rate in detail
To understand exchange rate, you should think of a currency as any other product like, say an iPad Air. If you want to buy an iPad Air, you need to pay USD 399.
Similarly when it comes to currencies if you want to buy a currency you need to pay its price in another currency. For instance, the price or exchange rate of 1 GBP is 1.5871 USD or 1.7984 CAD or 1.2744 EUR.
Exchange Rates in action
Let's say an American tourist visits the UK with USD 1,000. For any local transactions, he will require pounds. If it costs 1.5871 USD to buy 1 GBP, for 1,000 USD the tourist will get GBP 630.08.
Example 2: A Canadian exporter sells gems and metals to his clients in Japan, and gets his payments in Japanese Yen. As he has to manage his local expenses in Canadian dollars, he will be required to exchange the Japanese yen into Canadian dollars. Suppose he gets 100,500 JPY in one of his transactions. If the exchange rate for 1 CAD is 994.43 JPY, he will get 993 CAD for 100,500 JPY.
Exchange rate fluctuations
Exchange rates fluctuate due to a variety of factors such as a country's economic and political situation, its level of debt, and its rate of inflation.
If a country has high economic growth and a stable government, its currency will be more in demand or its price will go up. Or if a country is witnessing slower economic growth than expected or has high inflation, there will be less demand for the country's currency and its price will go down.
Example 3: In November 2014, Canada has given a weaker economic forecast than expected. So the price of Canadian dollars against other currencies has come down. You can buy more Canadian dollars with the same amount of GBP or AUD.
On November 3rd, the CAD-GBP exchange rate was 0.5547 or it cost 0.5547 GBP to buy 1 CAD. Because of the weaker than expected economic forecast, on November 4th the CAD-GBP exchange rate came down to 0.5477. With the reduced price, it will take less GBP to buy 1 CAD.
If you are an active trader, use our Forex margin calculator to check the margin used in the currency of your choice. Exchange rates are updated daily.
Forex: Supporting guides and articles
Use our Multi-Currency Forex Margin Calculator which is updated daily to calculate the best forex rate and manipulate forex margin ratio metrics for bespoke Forex Investment results. A popular and powerful free Forex tool.
- Forex Exchange Rate: Exchange rate is the price of one currency in another currency. Exchange rate is also known as the rate of exchange
- Forex Currency Pair: When you deal in the forex market, you deal in currency pairs. You cannot buy an individual currency. Instead you buy units of currency pairs.
- Forex Leverage: Forex leverage refers to investing in the forex market on a credit basis or by using debt.
- Forex Market: Forex or the foreign exchange market is used by people for buying and selling of currencies. The forex market is also known as the currency market.
- Forex Trading: Forex trading refers to the buying and selling of currencies to take advantage of the price movements and volatility of the forex market.
- Forex Margin Call: Margin call is a call from your forex broker when your account balance goes below the maintenance margin.
- Forex Margin Ratio: Forex Trading: Margin ratio is used for expressing the forex leverage in a ratio format.
- Forex Margin Used: Margin used indicates the amount you have actually used in a Forex trade, excluding any leverage.
- Forex Maintenance Margin: Maintenance margin refers to the minimum amount you need to maintain in your forex trading account.
- Forex: Price Interest Points (PIPs): PIPs or Price Interest Points are commonly used by forex traders to indicate profits or losses.
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