The Importance of Exchange Rate: Over and How It Works?

Concepts and Key Definitions

Exchange rate definition 

The price of a country’s money in regard to another country’s money is called an exchange rate. An exchange rate is “pre-determined”. Each currency is worth a particular measure of the metal or other standard,

(when countries use gold or another acknowledged standard.)

Understanding exchange rates

An exchange rate shows you the currency’s value in another country’s currency.

It is the price of a unit of foreign currency concerning domestic cash.

Picture it as the price being charged to acquire that currency. For example, in June of 2022, 1.05 U.S. Dollars was equal to 1 euro; exchange rates affect aspects of life indirectly. From the price of groceries to interest rates and employment opportunities.

For instance, the exchange rate in the Philippines is conventionally expressed as the price value of one U.S. dollar equivalent in peso.

US$1 = P55.32. (As of December 9, 2022). Remember that two currencies are involved in every other exchange rate quotation.

What is the essence of an exchange rate? 

The exchange rate is crucial for various reasons:

*Serves as a primary connection between the local and overseas markets for several goods, services, and financial assets. Using the exchange rate, we can differentiate prices of goods, services, and assets quoted in different currencies.

*Movements in the exchange rate can affect the country’s external sector. An example of an appreciation of the peso could lower the price competitiveness of exports in comparison with the products of those competitive countries whose currencies have not changed in value. Also, an example of the impact of foreign trade.

*Exchange rate influences the cost of servicing (principal and interest) the country’s foreign debt. Therefore, an appreciation of currency lessens the number of pesos needed to buy foreign exchange for maturing obligations and pay interest.

*Inflation can affect exchange rate movements and expectations about future price movements. Therefore, changes in the exchange rate movements directly affect the domestic prices of imported goods and services.

How is the exchange rate determined?

Exchange rates are described as the value of one nation’s or economic zone’s currency that can exchange for another country’s currency. Two categories indicate the rates:

  1. Domestic currency value
  2. Foreign currency value

Direct Quotation Vs. Indirect Quotation

Involves quoting the value of a unit of a foreign currency affecting the number of units of domestic currency exchanged are called direct Quotation.

Indirect Quotation of exchange rates pertains to expressing the price of a domestic currency affecting the price of units of foreign currency exchanged.

Cross Rates

It is a practice of quoting exchange rates in which several foreign currency exchange rates are used to entail the domestic exchange rate.


A lot of economic factors and variables capture the exchange rates. Like fluctuating for various reasons. Some of the causes of fluctuating are:

Interest rates, Inflation rates, Government Debt, Political Stability, Export or Import activities, Recession, Speculation, and Special Considerations.

On another perspective, some countries’ exchange rates constantly change; others use fixed exchange rates.

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