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Currency Exchange Rates
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Currency Exchange Rates


Definition:  Currency exchange rate is a ratio that defines the relative value relationship existing between two currencies at a given moment in time. Also referred to as foreign exchange rate, rate of exchange and exchange rate, the currency exchange rate between two currencies will normally vary over time (i.e., fluctuate) in response to economic and political circumstances (free market forces); this variable relationship is referred to as a floating exchange rate.

A government may choose to lock, or peg, its nation’s currency exchange rate to the value of another nation’s currency or to the value of a commodity (e.g., the Gold Standard), usually for purposes of increasing economic stability during a period of internal crisis or in order to insure uniformity in foreign trade. Such an arrangement is known as a fixed exchange rate. Currency exchange rates have often been pegged to the U.S. Dollar (USD) because the economy of the United States is widely considered to be one of the most stable and least risky economies in the world.

Currency exchange rates are essential to facilitate international exchange of goods and services (foreign trade), foreign investment and international travel. A currency’s exchange rate will ordinarily fluctuate slowly and over a narrow range; however, shocks to the economic or political stability of a country can cause rapid, large magnitude currency exchange rate fluctuations. Such shifts in currency values can adversely impact international businesses and travelers as well as governments. As foreign markets have become more closely tied to one another in a unified international structure, techniques such as hedging and sophisticated financial instruments known as derivatives have been designed to lessen the impact of currency shocks. Currency traders seek to reap profit from short-term fluctuations in currency markets; by so doing, they provide much-needed liquidity to financial markets during periods of economic stress.


Authored by Kenneth L. Anderson.  Original article published 25 March 2004.


The advent of ecommerce — the ability to effect mercantile transactions electronically through use of the Internet — has made it increasingly necessary for currency exchange rates to be both accurate and timely. Follow links to the right to learn more about currency exchange rates and exchange rate calculators courtesy of XE.com as well as additional information about how currency exchange and currency exchange rates work. Check Related Links at the left margin for additional topics such as international trade, internet business (ecommerce) and international travel. View our Business Center SiteMap for a complete list of our business and business-related topics and our Travel & Getaways SiteMap for a list of our travel topics.


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