Exchange Rate
Trading BasicsThe price of one currency expressed in terms of another currency. EUR/USD at 1.0850 means 1 euro equals 1.0850 US dollars.
What Is an Exchange Rate?
An exchange rate is the price at which one currency can be exchanged for another. In the Currency Pair EUR/USD at 1.0850, the exchange rate tells you that 1 euro buys 1.0850 US dollars. Exchange rates fluctuate continuously during market hours based on supply and demand.
What Moves Exchange Rates
Exchange rates are driven by interest rate differentials between central banks, economic data (GDP, employment, inflation), geopolitical events, trade flows, and market sentiment. A country with rising interest rates tends to see its currency strengthen as higher rates attract foreign capital. Major scheduled events that impact exchange rates include central bank rate decisions, non-farm payrolls (US), and CPI releases.
Direct and Indirect Quotes
From a US perspective, EUR/USD = 1.0850 is a direct quote (how much domestic currency per unit of foreign). USD/JPY = 149.50 is an indirect quote (how much foreign currency per unit of domestic). In practice, traders simply look at whether the rate is rising or falling to determine which currency is strengthening.
Related Terms
Currency Pair
Two currencies quoted together showing how much of one currency is needed to buy one unit of the other. EUR/USD = 1.0850 means 1 euro costs 1.0850 US dollars.
Base Currency
The first currency listed in a currency pair. In EUR/USD, the euro (EUR) is the base currency. One unit of the base currency is priced in terms of the quote currency.
Quote Currency
The second currency in a currency pair. In EUR/USD, the US dollar (USD) is the quote currency. It shows the price of one unit of the base currency.
Bid Price
The price at which the market (or broker) is willing to buy a currency pair from you. You sell at the bid price.
Ask Price
The price at which the market (or broker) is willing to sell a currency pair to you. You buy at the ask price. Also called the offer price.