Monetary policy

What are exchange rates?

An exchange rate indicates the value or price of a country’s currency in another currency.

Exchange rate example (EUR/USD)

For example, in 2020 the exchange rate of the euro against the dollar was EUR/USD 1.14 (average of daily data), meaning that we could buy $1.14 dollars with €1.

However, the value of the euro changes continuously. If the value of the euro increases with respect to the US dollar, we say it “appreciates” against that currency, and this allows us to buy more dollars with €1. When the value of the euro falls with respect to the US dollar, the euro “depreciates”: it becomes weaker and we are able to buy fewer dollars with €1.