Exchange rate

The price at which one currency exchanges for another, written against a pair. The first currency named is the base and is always one single unit; the second is the quote currency and is what gets counted. Because the base never scales, a rate that rises means the base has strengthened against the quote, for every pair without exception.

How a rate is determined depends on the regime the issuing authority runs. A freely floating currency is priced continuously by dealing between banks and other participants, with no single official level and no closing print. A pegged or managed currency is priced by a commitment: the authority stands ready to deal at or around a stated level, or within a band, and the market rate holds there for as long as the commitment is credible and the reserves behind it hold. Between the two sit crawling pegs and managed floats. A rate between two currencies that are not routinely dealt against each other is constructed from their rates against a common third currency, which is what a cross rate is.

Two things are routinely misread. The first is direction: a statement that a currency went up says nothing until the other side is named, because every rate is a comparison, and the same event lifts one pair and depresses another. The second is that a single rate is a simplification. Dealing quotes are two-sided, a bid and an ask, so a currency is bought at one number and sold at another, and the mid rate published in a newspaper is neither.