Currency exchange rates are the rates at which the value of one country’s currency is expressed in terms of another country’s currency. For example, at any point in time, one U.S. dollar can buy a specific number of Japanese yen or EU euros.
Currency exchange rates play a crucial part in a country’s trading capabilities, which is, of course, extremely important for every free market economy in the world. In fact, this exchange rate determines a country’s economic status and the influence it can exercise on the economy of the world. This is why, currency exchange rates are zealously monitored, examined and controlled by the government through various economic policies.
There are two ways in which the currency exchange rates are calculated. One is the fixed exchange rate, also called the pegged exchange rate, which is decided by the central bank of the government. It is considered to be stable. The other is the floating exchange rate in which the value of the currency varies according to the supply and demand conditions in the foreign exchange market, where the differences are automatically corrected in the market.
However, in today’s world market no currency exchange rates are exclusively fixed or floating.