What Are Foreign Currency Exchange Rates?
The cost to exchange one currency for another is defined as the foreign currency exchange rates. For an example, if you vacation in France you will have to pay your expenses in European Euros. If you are from the United States then you will use your American dollars to buy European Euros.
Let’s assume that you go to your bank and buy $1000 worth of Euros. The bank gives you 743 Euros for 1000 U.S. dollars. That means that each dollar is worth .743 European Euros. This is the exchange rate for converting dollars to Euros.
While in France you may run out of money which means that you have to buy more Euros from a bank in country. You buy another 1000 dollars in Euros and this time you get only 740. The exchange rate had dropped from .743 to .740. The dollar is worth less than before you left home.
When you return home you have 100 Euros left and you exchange them at your bank. If the bank gives you 75 dollars then each Euro is worth 1.7500 dollars. The exchange rate has increased since you left France. This is the exchange rate for converting Euros to dollars.
A useful rule for conversion of currencies is to divide the known rate by 1. If the exchange rate for Euros to Dollars is 1.743 then the rate for Dollars to Euros is .7430.
In practice the exchange of currencies is never this simple because banks and other market institutions make money by selling the currency for more than they paid for it. They also buy the currency for less than the price they intend to sell. This difference is called the spread and it is an important cost of business for any trader and the subject of another article. That is a quick primer on Currency Exchange Rates.