Exchange Rate is the price of a unit of foreign currency in terms of the

domestic currency. In the Philippines, for instance, the exchange rate is

conventionally expressed as the value of one US dollar in peso
equivalent. For example, US$1 = P41.00. In every exchange rate
quotation, therefore, there are always two currencies involved.
Exchange rate is one of the most important determinants of a
country's LEVEL OF ECONOMIC HEALTH and hence the well-being of all
the people residing in it. It also plays a vital role in a country's LEVEL
OF TRADE, which is critical to every free market economy in the world.
(For this reason, exchange rates are among the most watched,
analyzed and governmentally manipulated economic measures.)
The exchange rate is important for several reasons:
a. It serves as the basic link between the local and the overseas
market for various goods, services and financial assets. Using the
exchange rate, we are able to compare prices of goods, services, and
assets in different currencies.
b. Exchange rate movements can affect actual inflation as well as
expectations about future price movements. Changes in the exchange
rate tend to directly affect domestic prices of imported goods and
services. A stronger peso lowers the peso prices of imported goods as
well as import-intensive services such as transport, thereby lowering
the rate of inflation.
For instance, an increase in the value of the peso from $1:P50 to
$1:P40. This will lower the price of a $1 per liter gasoline from P50.00
(P50 X $1) to P40.00 (P40X $1).
c. Exchange rate movements can affect the countrys external sector
through its impact on foreign trade. An appreciation of the peso, for
instance, could lower the price competitiveness of our exports versus
the products of those competitor countries whose currencies have not
changed in value.
d. The exchange rate affects the cost of servicing (principal and
interest payments) on the countrys foreign debt. A peso appreciation
reduces the amount of pesos needed to buy foreign exchange to pay

interest and maturing obligations.

trading of different national currencies or units of account. It is the

amount of one currency that has to be given up to
acquire another currency.

The exchange rate expresses the national currency's quotation in

respect to foreign ones. For example, if 1 peso is worth 2 japanese yen,
then the exchange rate of japanese yen is 1 peso. If something costs
100 pesos, it automatically costs 200 japanese yen as a matter of
accountancy. Thus, the exchange rate is a conversion factor, a
multiplier or a ratio, depending on the direction of conversion.
The exchange rate is important because it is one of the most important
determinants of a country's LEVEL OF ECONOMIC HEALTH and hence
the well-being of all the people residing in it. Exchange rates also play
a vital role in a country's LEVEL OF TRADE, which is critical to most
every free market economy in the world. For this reason, exchange
rates are among the most watched, analyzed and governmentally
manipulated economic measures.
Exchange rates change every day. When the exchange rate changes
this can affect different stakeholders in different ways depending on
the direction of the change. The terms strengthened and weakened
are used when exchange rates change and it is important to
understand what is meant when an exchange rate has strengthened or
weakened.
If a currency increases in value, it is said to strengthen. This means
that a pound will buy (be exchanged for) more of a foreign currency.
Look at the example in the graph. The graph shows the value of
Japanese Yen per 1 Philippine Peso (in) monthly average (in 2009). In
January, one peso could be exchanged for 1.9 yen. In May, the
exchange rate is 1 peso to 2 yen. The value of peso has risen or
strengthened because 1 peso can now be exchanged for 2 yen rather
than 1.9 yen. It is stronger in the sense that it will buy more of a
foreign currency.

The reverse is the case when peso falls in value; when this happens it
is said to weaken. Look at the graph again. In May, 1 peso could be
exchanged for 2 yen. However, in July, the change in the exchange rate
means that every peso can now only be exchanged for 1.9 yen.

IMPORTANCE
It is important because the exchange rate, the price of one currency in
terms of another, is a major determinant of a nations economic health
and hence the well-being of all the people residing in it.

An exchange rate of 1 = 1.30 means that an

individual or business has to give up 1 to get 1.30 euro. Exchange
rates change
every day. When the exchange rate changes this can affect different
stakeholders
in different ways depending on the direction of the change. The terms
strengthened and weakened are used when exchange rates change
and it is
important to understand what is meant when an exchange rate has
strengthened
or weakened.

Strengthening exchange rate

Exchange rates can be tricky to understand, and
come with their own terminology. A key thing to remember is that this
section all
relates to a UK perspective. If the pound increases in value, it is said to
strengthen. This means that a pound will buy (be exchanged for) more
of a
foreign currency. Look at the example in Table 1. In April, one pound
could be
exchanged for 1.5 euro. In June, the exchange rate is 1 = 2.00. The
value of the
pound has risen (strengthened ) because 1 can now be exchanged for

2 rather
than 1.50. It is stronger in the sense that it will buy more of a foreign
currency.

Weakening exchange rate The reverse is the case when the pound falls
in value;
when this happens it is said to weaken. In the example in Table 2 the
pound has
weakened against the euro. In June 1 could be exchanged for 2.00.
However,
in November the change in the exchange rate means that every pound
can now
only be exchanged for 1.40.

I
mportance of Exchange Rates
For the managers, exchange rates influence prices of firms inputs as
well as outputs. Firms also hedge against currency risk. Details of
currency risk exposure are included in the annual reports of the firms

In a slightly different perspective, the exchange rate is a price. If the

exchange rate can freely move, the exchange rate may turn out to be
the fastest moving price in the economy, bringing together all the
foreign goods with it.=
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