Lesson 77 - Exchange Rates
Exchange rates determine how much one currency is worth compared to another. They affect the price of imports and exports, international travel, and investment flows. Exchange rates move constantly, influenced by supply and demand, interest rates, inflation, and confidence in a country’s economy. This lesson explains what exchange rates are, how they are set, and why they matter.
What is an exchange rate?
An exchange rate is the price of one currency expressed in terms of another. For example, if 1 US dollar buys 0.90 euros, the USD/EUR exchange rate is 0.90. If the rate rises to 1.00, the dollar has strengthened relative to the euro. Exchange rates are quoted in pairs because they always involve two currencies.
Table: Factors influencing exchange rates
Graph 1: USD/EUR exchange rate (2000–2022)
This chart shows how the US dollar and euro have moved against each other over two decades.
The euro was strong in the mid-2000s, then weakened after the European debt crisis, while the dollar gained during periods of Fed rate hikes.
Graph 2: Safe haven currencies in crises
During global crises, investors often move into currencies seen as safe, such as the Swiss franc and Japanese yen.
Safe haven currencies strengthen when risk appetite falls.
Story: Argentina’s currency crisis
Argentina has faced repeated currency crises due to inflation and debt. In 2018, the peso lost more than 50% of its value against the dollar in one year. Imports became unaffordable, savings were wiped out, and the government had to seek IMF assistance. This story shows how unstable exchange rates can devastate households and businesses when confidence collapses.
Why exchange rates matter for you
Exchange rates affect your life if you travel abroad, buy imported goods, or invest internationally. A weaker domestic currency makes imports more expensive but helps exporters. A stronger currency makes travel and imports cheaper but can hurt local producers. For investors, exchange rate moves can magnify or reduce returns on foreign stocks and bonds.
Summary
- Exchange rates show the price of one currency in terms of another.
- They move based on interest rates, inflation, trade balances, and confidence.
- Charts show USD/EUR history and safe haven currency behavior.
- Stable exchange rates support trade, investment, and savings.
Key Terms
Further Learning
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