Currency exchange rate — Definition Explained Simply | Examples & Role
Currency exchange rate is the rate at which one currency is exchanged for another in banks, exchange offices, and on the foreign exchange market.
Currency exchange rate is the price at which one currency is exchanged for another in real transactions. It reflects the current value of foreign currency relative to the national currency and is applied in exchange operations in banks, exchange offices, and on international markets (Forex).
Unlike the official exchange rate, which may be set by the government or central bank, the currency exchange rate is formed based on market conditions and the policy of a particular bank or financial institution. Therefore, it may differ from the official rate. The difference between the buying and selling rates is called the spread and represents the profit margin for banks and exchange offices.
Factors influencing the exchange rate
- Supply and demand for the currency at a given moment.
- Bank or exchange office policy (markup and margin).
- Global fluctuations in exchange rates (e.g., the rise or fall of the dollar and euro on Forex).
- Regulation by the central bank.
Difference between exchange rate and official currency rate
The official exchange rate is an economic indicator reflecting the ratio between two currencies in the market or in official publications. The currency exchange rate is the practical rate at which individuals and companies actually perform currency exchange transactions. Usually, the exchange rate is slightly less favorable for customers due to commissions and spreads.
Examples
- The official dollar rate is 95 RUB, but in a bank the exchange rate may be 96 RUB for buying and 94 RUB for selling.
- At airports, the euro-to-dollar exchange rate is often less favorable than in city exchange offices.
- On Forex, the exchange rate is formed in real time and constantly fluctuates.