How Exchange Rates Work

Exchange rates determine how much one currency is worth in terms of another. Whether you're travelling abroad or sending money internationally, understanding how rates work helps you make smarter decisions.

What Is an Exchange Rate?

An exchange rate is simply the price of one currency expressed in another. For example, if GBP/USD = 1.27, it means 1 British pound buys 1.27 US dollars. Rates fluctuate constantly during trading hours based on supply and demand in the global foreign exchange (forex) market.

What Moves Exchange Rates?

• Interest rates — Higher rates attract foreign investment, strengthening a currency
• Inflation — Lower inflation typically supports a stronger currency over time
• Economic data — GDP growth, employment figures, and trade balances all influence demand
• Political stability — Uncertainty or instability tends to weaken a currency
• Market sentiment — Trader expectations and risk appetite drive short-term movements

Reading Currency Pairs

Currency pairs are written as BASE/QUOTE. The base currency (first) is what you're buying; the quote currency (second) is what you're paying. In EUR/GBP = 0.86, you pay 0.86 pounds for 1 euro.

Fixed vs Floating Rates

Most major currencies (GBP, USD, EUR, JPY) use floating rates that move freely based on market forces. Some currencies are pegged (fixed) to another currency — for example, the UAE dirham is pegged to the US dollar at approximately 3.67 AED per USD.