Currency exchange rate is the rate at which one nation's currency can be exchanged for another nation's currency in the foreign exchange market. It determines the value of one currency in terms of another. Currency exchange rates fluctuate constantly due to a multitude of factors such as political developments, economic indicators, market forces, and investor sentiment. These rates play a crucial role in international trade, investments, tourism, and overall global economic interactions.
Exchange rates are commonly expressed as two types: the spot exchange rate and the forward exchange rate. The spot exchange rate refers to the current rate at which currencies are traded for immediate delivery. On the other hand, the forward exchange rate is a rate agreed upon today for a future exchange, usually in the form of a forward contract.
Exchange rates impact various aspects of the economy, including import and export competitiveness. A high exchange rate makes imports cheaper, thus stimulating domestic consumption of foreign goods, whereas it makes exports more expensive, affecting a country's competitiveness in international markets. Conversely, a low exchange rate makes exports cheaper and imports more expensive, boosting domestic industries but potentially increasing import costs for consumers.
Governments, central banks, and financial institutions monitor and often intervene in currency exchange markets to regulate exchange rates and maintain stability. This can involve buying or selling currencies to influence the supply and demand dynamics and control excessive fluctuations in the exchange rate, commonly known as central bank intervention. These interventions aim to balance trade, stimulate economic growth, and safeguard financial markets from volatility.
