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Exchange Rate

The price of one country's currency expressed in another country's currency. In other words, the rate at which one currency can be exchanged for another.

Notes:

In most financial papers, currencies are expressed in terms of U.S. dollars, while the dollar is commonly compared to the Japanese yen, the British pound and the euro.

See also: Currency, Currency Forward, Forex, Transaction Exposure, Translation Exposure

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Exchange rate

The price of one country's currency expressed in another country's currency.

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exchange rate

The price of one currency expressed in terms of another currency. For example, if the U.S. dollar buys 1.40 Canadian dollars, the exchange rate is 1.4 to 1. Changes in exchange rates have significant effects on the profits of multinational corporations. Exchange rate changes also affect the value of foreign investments held by individual investors. For a U.S. investor owning Japanese securities, a strengthening of the U.S. dollar relative to the yen tends to reduce the value of the Japanese securities because the yen value of the securities is worth fewer dollars. Also called foreign exchange rate. See also devaluation, fixed exchange rate, floating exchange rate, foreign exchange risk.

How do currency exchange rates influence investment values?

When the exchange rate between the foreign currency of an international investment and the U.S. dollar changes, it can increase or reduce your investment return. Because foreign companies trade and pay dividends in the currency of their local market, you will need to convert the cash you receive from dividends or the sale of the investment into U.S. dollars. Therefore, if the exchange rate changes significantly between the time you buy and the time you sell, it can sometimes turn a positive return in the investment itself into a loss for the investment in total, or vice versa.

International investment returns increase when the dollar weakens in value against another currency, because each unit of foreign currency translates into more U.S. dollars. On the other hand, if the U.S. dollar strengthens against the foreign currency, it translates each foreign currency unit into fewer U.S. dollars and therefore diminishes your returns.

Thomas M. Tarnowski, Senior Business Analyst, Global Investment Banking Division, Citigroup, Inc.Salomon Smith Barney, New York, NY, and London, UK