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What is the currency exchange rate?
The exchange rate is the amount in one currency that you need to pay to buy another currency. One currency will be exchanged for another at this rate. There are two types of exchange rates:
Current exchange rate. This rate is utilized to convert currencies during current operations, for example, during online shopping or when trading currencies on financial markets.
Forward exchange rate. This rate is calculated for the current day but is used for future calculations. Usually, the forward rate differs from the current one, as it covers many risk factors and reflects the expectations of the foreign exchange market participants.
Currencies trade against each other as exchange rate pairs and thus the exchange rate always affects the value of the currencies in pairs with respect to each other.
If the price of the base currency (the currency which you want to buy) is growing, the value of the quoted currency (for which you buy the base currency) falls in relation to the base one.
For example, if you want to buy Euros for US Dollars (in the EUR/USD currency pair) at a rate of 1 Euro / 1.25 US Dollars, you need to pay 1.25 US Dollars to buy 1 euro.
If the Euro grows, the exchange rate can become equal, let's say, to 1 Euro / 1.30 US Dollars.
It means that the Euro has risen in price, and now you will need to pay 1.30 US Dollars to buy 1 Euro. In other words, the Euro is up against the US Dollar.
Exchange rates in financial markets are determined by the market forces of supply and demand.
This means there is always the seller's price (Ask) and the buyer's price (Bid). The difference between these prices is called the spread.
All popular currencies are traded on the foreign exchange (Forex) market.
Popular Currency Pairs
Popular currencies are traded on the global foreign exchange (Forex) market in pairs. The first currency in each pair is the one you buy or sell (base currency acts as merchandise) and the second is the one you pay with (payment currency acts as money). The currency of your trading account does not matter since the exchange is made automatically and transparently for you. For example, if you decide to buy the EUR/USD pair (Euro Vs US Dollar), you will be buying Euros for US Dollars.
Unlike Stock Exchange, the Forex market is decentralized and is therefore traded 24 hours a day. A lot of currencies can be traded at any time of the day. In the Forex market, you can generate profit from currency rate changes whenever you want, buying or selling as much currency as you can afford. You can find out more about how Forex trading profit is calculated from the article Forex Trading ABC. Below are the most popular currency pairs.