How to Understand Currency Rates

Understanding currency rates is fairly easy.
Understanding currency rates is fairly easy. (Image: exchange fluctuations image by Raimundas from <a href=''></a>)

Currency rates, also known as foreign exchange rates or simply exchange rates, are the rates that tell how much currency you need to buy a unit of another currency. Currency rates are quoted on exchange rate desks, in banks, and in the media. There are interbank currency rates--rates that banks and brokers use when dealing with each other--and retail rates--rates that individuals get when they want to exchange currencies.

Identify what exchange rate you need to get and find out their codes. You need to know what currencies' exchange rates you need to determine. Then, look up their international currency codes, which consist of three capital letters. For example, the currency code of the euro is EUR, while that of the U.S. dollar is USD.

Look up an exchange rate for your currencies. Use any search engine to look for the currency codes whose exchange rate you are interested in. For example, if you need to know the exchange rate of the euro and U.S. dollar, type "EUR/USD" or "USD/EUR".

Read the exchange rate. Typically, the exchange rate is always greater than 1. This is so because traditionally the exchange rates are given in a way that you will know how much of the relatively cheaper currency you will need to buy a unit of a more expensive currency. For example, because the euro is more expensive than the U.S. dollar, the traditional exchange rate says how many dollars you need to buy 1 euro. The notation for this exchange rate is EUR/USD. Here, the first part of the quotation (EUR) indicates the currency that is more expensive, and the second part (USD) tells us the currency that is relatively cheaper.

If you need to find out a reverse exchange rate, divide 1 by the exchange rate. For example if EUR/USD is 1.3, then USD/EUR will be 1 / 1.3 = 0.77. You need 0.77 euros to buy 1 dollar.

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