The economy
Exchange rate
The price of one currency in terms of another.
How it works
Exchange rates are driven over the short run by interest-rate differences and capital flows, and over the long run by relative inflation and productivity.
They matter to investors directly through foreign holdings, and indirectly through the earnings of companies that sell abroad.
Related terms
- Currency riskThe risk that exchange-rate moves change your return on a foreign holding.
- Carry tradeBorrowing in a low-interest currency to invest in a higher-yielding one, keeping the difference.
- InflationThe rate at which prices rise, which means the rate at which each pound or dollar buys less.
- Interest rateThe cost of borrowing money, set at the short end by the central bank.
Mentioned in
More in The economy
Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.