Currency Exchange Rates

How currencies trade, what drives their value, and why exchange rates matter for global economy

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The Global Currency Market

Every day, over $7.5 trillion worth of currencies change hands in the foreign exchange (forex) market—the world's largest and most liquid financial market. When you travel abroad, buy imported goods, or invest internationally, you're participating in this massive currency exchange system.

Exchange rates determine how much one currency is worth in terms of another. They affect everything from vacation costs to corporate profits, inflation rates to national competitiveness. Understanding what drives these rates is essential for navigating our interconnected global economy.

What Is an Exchange Rate?

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Price of Currency

EUR/USD = 1.10 means €1 costs $1.10. It's literally the price to buy one currency using another.

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Constant Fluctuation

Rates change every second based on supply and demand in 24/7 global markets across time zones.

Reading Currency Pairs

EUR/USD = 1.10 → Base currency (EUR) / Quote currency (USD)

• You're buying the base (EUR) and selling the quote (USD)

• If rate goes UP (1.10 → 1.15), EUR strengthened (USD weakened)

• If rate goes DOWN (1.10 → 1.05), EUR weakened (USD strengthened)

Why Exchange Rates Matter

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International Trade: A strong dollar makes US exports expensive (hurts exporters) but imports cheap (helps consumers). Trade balance depends on competitive exchange rates.
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Inflation Control: Weak currency raises import prices (imported inflation). Strong currency lowers import prices (deflationary pressure). Central banks monitor rates closely.
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Investment Returns: Currency gains/losses can dwarf investment returns. A 10% stock gain disappears if the currency falls 12% against your home currency.
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Economic Competitiveness: Countries sometimes manipulate rates to gain trade advantages—the "currency wars" you hear about in financial news.
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Market Size Perspective

The forex market trades $7.5T daily—more than all global stock markets combined. It's bigger than the entire US GDP (which is $27T annually). This massive liquidity means currencies are highly efficient markets where information is instantly priced in.