What does the exchange rate represent?

The exchange rate is fundamentally the price of one currency in terms of another currency. It indicates how much of one currency can be exchanged for a unit of another currency. For instance, if the exchange rate between the US dollar and the euro is 1.2, this means that 1 US dollar can be exchanged for 1.2 euros.

Understanding the exchange rate is crucial for international trade and investment, as it impacts the costs of goods, services, and capital across borders. It serves as a key indicator of the relative value of currencies and is influenced by various economic factors such as interest rates, inflation, and economic stability.