In simple terms
An exchange rate is the price of one currency measured in another. It says what a euro, a rand or a rupee is worth abroad.
Every rate works in both directions. If one euro buys 170 yen, one yen buys roughly 0.0059 euros. That is the same rate, read the other way round.
How it works
Countries do not all let that price move in the same way. The IMF sorts arrangements into three broad families.
Hard pegs lock the rate in place, through a currency board or by adopting another currency in a monetary union. Intermediate regimes keep the rate fairly rigid without a formal promise to defend one number. Floating rates are left to the market, with little or no official intervention.
Each choice trades one advantage for another. IMF research found that pegs produced the best inflation record in developing economies, largely because a public commitment is credible. More rigid regimes also went with deeper trade links and steadier capital flows. In exchange they limit monetary and fiscal freedom, leave a country more exposed to currency and financial crises, and delay external adjustment, which allows larger deficits and surpluses to build. Intermediate regimes were associated with the fastest growth in output per person, by roughly half a percentage point a year.
Why it matters
The market behind these prices is vast. The Bank for International Settlements counted 9.6 trillion US dollars of foreign exchange turnover a day in April 2025, 28 percent more than three years earlier. The US dollar sat on one side of 89 percent of all trades. Sales desks in just four places, the United Kingdom, the United States, Singapore and Hong Kong SAR, handled 75 percent of the total, with the United Kingdom alone at 38 percent.
For most people the rate shows up indirectly. It moves the price of imported food, fuel and medicines, the cost of a trip abroad, the value of money sent home to family, and the local currency cost of repaying a loan taken out in dollars.
Where you’ll see it
- Airport and bank boards, where buy and sell prices sit either side of the market rate.
- Central bank websites publishing daily reference rates.
- Card and remittance statements, where a margin is added to the rate used.
- Company results that separate underlying growth from currency movements.
Example
If a currency moves from 15 to 18 units per US dollar, dollar-priced imports cost more at home, while the country’s exports become cheaper for foreign buyers.
Often confused with
The rate you actually receive. Quoted market rates are wholesale. Travel desks, cards and transfer services add a spread, so the rate printed on a receipt is usually less favorable.
Key facts
- The IMF groups exchange rate arrangements into hard pegs such as currency boards and monetary unions, intermediate regimes, and floating rates.1
- Pegged regimes delivered the strongest inflation performance for developing economies, largely through the credibility of a formal commitment to the parity.1
- More rigid regimes were associated with deeper trade integration and more stable capital flows, but also with greater susceptibility to currency and financial crises and with delayed external adjustment.1
- Intermediate regimes were associated with faster growth in output per person, of about half a percentage point a year.1
- Global foreign exchange turnover reached 9.6 trillion US dollars a day in April 2025, 28 percent higher than in 2022.2
- The US dollar was on one side of 89 percent of all foreign exchange trades in April 2025.2
- Sales desks in the United Kingdom, the United States, Singapore and Hong Kong SAR together accounted for 75 percent of turnover, with the United Kingdom at 38 percent.2
This entry explains a financial term. It is not financial advice.
Go deeperWhat Makes Currency Exchange Rates Fluctuate?Related concepts
In the news
Quick checkWhat are the three broad families of exchange rate arrangement the IMF uses?Show answer
Hard pegs, intermediate regimes, and floating rates set by the market.
Sources
- International Monetary Fund, Finance & Development. Choosing an Exchange Rate Regime. December 2009 (accessed 15 September 2026)
- Bank for International Settlements. Global FX trading hits $9.6 trillion per day in April 2025 and OTC interest rate derivatives surge to $7.9 trillion: Triennial Survey. 30 September 2025 (accessed 15 September 2026)
Editorially reviewed by Specialty Digest Editorial TeamLast reviewed September 16, 2026Researched and drafted with AI assistanceReport an issue