Exchange rates tell you how much one country’s money is worth in terms of another country’s money. They matter when people travel, shop online from foreign sellers, send money abroad, or compare prices across countries. Businesses also use exchange rates when importing goods, exporting products, and planning international investments.
A small change in an exchange rate can make a trip, purchase, or business deal more or less expensive.
Key Facts
- Exchange rate = price of one currency in terms of another currency.
- If 1 USD = 0.92 EUR, then 100 USD = 92 EUR.
- Converted amount = starting amount × exchange rate.
- Starting amount = converted amount ÷ exchange rate.
- A stronger currency buys more foreign currency, while a weaker currency buys less.
- Banks and currency exchanges often charge fees or use a less favorable rate than the market rate.
Vocabulary
- Exchange rate
- The exchange rate is the value of one currency compared with another currency.
- Currency
- A currency is the money used by a country or group of countries, such as the dollar, euro, yen, or pound.
- Appreciation
- Appreciation happens when a currency increases in value compared with another currency.
- Depreciation
- Depreciation happens when a currency decreases in value compared with another currency.
- Foreign exchange market
- The foreign exchange market is the global marketplace where currencies are bought and sold.
Common Mistakes to Avoid
- Multiplying when you should divide is wrong because the direction of the exchange rate matters. If the rate is given as 1 USD = 0.92 EUR, use multiplication to convert dollars to euros but division to convert euros to dollars.
- Ignoring fees is wrong because the final amount you receive may be less than the simple exchange-rate calculation. Banks, airports, and card companies may include service charges or unfavorable rates.
- Assuming a high number means a stronger currency is wrong because rates depend on which currency is listed first. For example, 1 USD = 150 JPY does not mean the yen is stronger than the dollar.
- Treating exchange rates as fixed is wrong because many rates change throughout the day. News, interest rates, inflation, trade, and investor demand can all move currency values.
Practice Questions
- 1 A traveler has 300 USD and the exchange rate is 1 USD = 0.90 EUR. How many euros can the traveler get before fees?
- 2 A pair of shoes costs 12,000 JPY. If 1 USD = 150 JPY, what is the price in U.S. dollars?
- 3 A U.S. student plans to study in Europe. Explain how a stronger U.S. dollar compared with the euro would affect the student’s living costs in Europe.