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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.
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.
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 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.
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