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What are Exchange Rates?
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An exchange rate shows how much one currency is worth in another. It changes constantly due to supply and demand in the market.
For example, if 1 euro (EUR) equals 1.20 US dollars (USD), you can exchange 1 euro for 1.20 dollars.
Exchange rates are important for trade, travel, and investments. They impact the price of goods, profits from international deals, and how much money travelers get when exchanging currencies.
Rates depend on things like government policies, inflation, interest rates, and political stability. They are always changing due to market events and speculation.
On this page, we explain exchange rates, how they work, and answer common questions.
How Are Exchange Rates Calculated?
An exchange rate has two parts:
- The base currency
- The target currency
Example: 1 USD = 0.7 GBP*
This means 1 US dollar (USD) gets you 0.7 British pounds (GBP). For 520 USD, you’d get 365 GBP at this rate.
Exchange rates are also shown in reverse. For the above example, 1 GBP would equal 1.4 USD.
*Examples are for illustration only.
How Are Exchange Rates Determined?
Governments use three systems to set exchange rates: floating, fixed, and hybrid.
Floating Exchange Rates
Floating rates change based on global supply and demand. Examples include the US dollar ($), euro (€), and pound (£).
Fixed Exchange Rates
Fixed rates are tied to another currency or a group of currencies. Examples include the Hong Kong dollar (HK$) and UAE dirham (د.إ).
Hybrid Exchange Rates
Hybrid systems combine floating or fixed rates with government controls.
FAQs About Exchange Rates
Why do exchange rates differ from place to place?
Prices differ from second to second and day to day, and different sources use different data or update times.
Do you lose money exchanging currency?
Service providers add a fee (markup) to exchange rates. Comparing providers can save money.
What is a closed currency?
Closed currencies can’t be exchanged outside their country or have strict controls, like banning foreign ownership.
Is cash or card cheaper abroad?
Cards are often cheaper, especially when charged in the local currency. Some services, like Revolut, offer no-fee withdrawals.
What’s the strongest currency?
Currencies like the US dollar (USD), Swiss franc (CHF), and euro (EUR) are strong due to stable economies.
What’s the weakest currency?
Weak currencies, like the Venezuelan bolívar (VEF) or Zimbabwean dollar (ZWL), have high inflation or instability.