What’s an exchange rate?

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The foreign exchange market is the biggest financial market on the planet. Basically a consortium of world banks, this consortium/market sets the exchange rate, known as the FX rate, the FOREX rate. The exchange rate is, in its most basic terms, how much a nation’s currency is worth compared to all other national currencies.

Currency is, of course, money. The exchange rate establishes how much, for example, a dollar of US money is worth in Japanese money, known as the yen. In this particular case, the quoted rate, the official value of one United States Dollar (USD) is 102 Japanese Yen (JPY). This is the quoted exchange rate between the USD and the JPY and is known as the “spot rate”, the current exchange rate. Occasionally, the rate may be quoted as a “forward exchange”, an exchange rate negotiated today, but the actual payment is deferred until a specified future date.

Several factors will influence the exchange rate. For example, when the Eurodollar, or Euro (EUR), was introduced to the world’s economic and financial markets, the exchange rate of Euros for all other currencies, an entirely new rate had to be determined based on the Eurodollar. China’s yuan renminbi (RMB), currently considered artificially deflated and essentially backed by the dollar, will be revalued to adjust to its actual inflated nature, causing further rearrangements in exchange rates.

The currency of various nations is called free floating. This means that your exchange rate against all other currencies fluctuates daily. In some rare cases, it may vary hourly. Several factors can cause a given currency to become floating, including an unstable government, a national disaster, the fluctuating value of a particular country’s assets on the world market, changes in the value of the monetary base, etc.

There are several websites on the Internet that allow the user to determine exchange rates between major currency denominations using their interactive currency calculator. It’s simple to find a site and, after determining if the site has the specific currencies you want, click on one national currency and then another for the current exchange rate of your chosen currencies. It should be noted that the rates quoted on these foreign exchange websites are, as a general rule, not the official foreign exchange market rates. These are the rates used by the bank or banks these sites are affiliated with. In general, however, the difference will be negligible.

Asset Smart.

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