Exchange rate

What one currency is worth in terms of another. For example, one Argentine dollar might be worth 58 US cents or 70 Japanese yen. Currencies traded freely in foreign-exchange markets have a spot rate (applying to trades settled 'spot', that is, two working days hence) and a forward rate (which is the spot rate adjusted for the interest rate differential between the two currencies until maturity). Countries can determine their exchange rates in several ways:

  • A floating exchange rate system, where the currency finds its own level in the market.
  • A crawling or flexible peg system, which is a combination of an officially fixed rate and frequent small adjustments that in theory work against a build-up of speculation about a revaluation or devaluation.
  • A fixed exchange-rate system, where the value of the currency is set by the government and/or the central bank.

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