| 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. 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 |
An advantage to a floating exchange rate is the fact that it tends to be more economically efficient. However, floating exchange rates tend to be more volatile, depending on the particular currency. Pegged exchange rates are generally more stable, but, since they are set by government fiat, they may take political rather than economic conditions into account. For example, some countries peg their exchange rates artificially low with respect to a major trading partner to make their exports to that partner artificially cheap. See also: Currency pair, Eurodollar.
Exchange rate. The exchange rate is the price at which the currency of one country can be converted to the currency of another. Although some exchange rates are fixed by agreement, most fluctuate or float from day to day.
Daily exchange rates are listed in the financial sections of newspapers and can also be found on financial websites.
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