In 

finance, an exchanger ate i

st he
rateatwhi chone  cur r
ency  willbe
exchangedf oranot hercur rency .
Curr enci esar emostcommonl y
national cur r
enci es, butmaybesub-
national asi nt hecaseofHong
Kongorsupr a-national asi nthe
caseoft heeur o.
Theex changer ateisal sor egarded
ast hev alueofonecount ry's
currencyi nr elat i
ont oanot her
[
1]
currency .  Forex ampl e,
an i
nt erbankexchanger ate of
114  Japanesey en tot he Uni t
ed
Statesdol l
ar meanst hat¥114wi l
l
beexchangedf orUS$1ort hatUS$1
willbeex changedf or¥114.I nthis
casei tissai dt hatt hepr iceofa
dollari nr elationt oy eni s¥114, or
equi valent lythatt hepr i
ceofay en
i
nr el ationt odol l
arsi s$1/ 114.
Eachcount rydet ermines
the 
ex changer at eregi me  thatwi ll
applyt oi t
scur rency .Forex ampl e,a
currencymaybe  fl
oat ing, pegged
(fi
xed) ,orahy br id.Gov ernment s
cani mposecer tainlimi tsand
controlsonexchanger ates.
Count riescanal sohav east rongor
weakcur r
ency .Ther ei sno
agreementi nt heeconomi c
l
iter
at ureont heopt i
mal national
exchanger ate( unlikeont hesubj ect
oftradewher ef reet radei s
[
2]
consider edopt imal ).  Rather ,
nati
onal exchanger at er egimes
[
2]
refl
ectpol iti
cal consi der ations.
Infl
oat ingex changer at eregi mes,
exchanger atesar edet ermi nedi n
the 
for ei gnex change
[3]
mar ket,  
whichi sopent oawi de
rangeofdi ff
erentt ypesofbuy ers
andsel lers, andwher ecur r
ency
tradingiscont inuous: 24hour sa
dayex ceptweekends( i
.e.trading
from 20: 15  GMT  onSundayunt il
22:00GMTFr iday ).The  spot
exchanger ate ist hecur rent
exchanger ate, whi let he forwar d
exchanger ate isanexchanger ate
thatisquot edandt radedt odaybut
fordeliver yandpay mentona
speci f
icf utur edat e.
Inther etail cur rencyex change
mar ket,di f
f erentbuy ingandsel ling
rateswi llbequot edbymoney
dealers.Mostt radesar et oorf r om
thelocal cur rency .Thebuy ingr ate
i
st her ateatwhi chmoneydeal ers
wi l
lbuyf or eigncur rency , andt he
selli
ngr atei sther ateatwhi cht hey
wi l
lsellthatcur rency .Thequot ed
rateswi llincor por ateanal l
owance
foradeal er'
smar gi n( orprofit)i
n
trading,orel set hemar gi
nmaybe
recov eredi nthef or m of
a commi ssion ori nsomeot herway .
Differentr atesmayal sobequot ed
forcash, adocument arytransact i
on
orf orelect r
onict ransf ers.The
higherr at eondocument ary
transact ionshasbeenj ustif
iedas
compensat i
ngf ort headdi ti
onal
ti
meandcostofcl ear i
ngt he
document .Ont heot herhand, cash
i
sav ail
abl ef orresal ei mmedi ately
,
buti ncur ssecur i
ty, storage,and
transpor tat i
oncost s, andt hecost
oft yingupcapi talinast ockof
banknot es( bill
s) .
Ther
etai
lexchangemar
ket
[edi
t]

Cur
rencyf
ori
nter
nat
ional
trav
eland
cross- borderpay ment sis
predomi nant lypur chasedf rom
banks, f
or eignex changebr oker ages
andv ari
ousf ormsof  
bur eauxde
[ci
tati
onneeded]
change.  
Theser etail
outletssour cecur rencyf rom t he
i
nter bankmar ket s,whichar ev alued
byt he Bankf orI nternational
Settlement s  atUS$5. 3trilli
onper
[4]
day.  Thepur chasei smadeat
the spotcont ract  r
ate.Ret ail
cust omer swi l
l bechar ged, int he
form ofcommi ssi onorot her wi se,
tocov erthepr ovider'scost sand
gener ateapr of it
.Onef orm of
char geist heuseofanexchange
ratet hatisl essf av ourabl et hant he
[
5]
whol esal espotr ate.  The
diff
er encebet weenr etail buy ingand
sell
ingpr i
cesi sref err
edt oas
the bid–askspr ead.
Quot
ati
ons[
edi
t]

Exchanger atesdi splayi n 

Thailand
Mai nar t
icle: Cur rencypai r
Ther ei samar ketconv ent
ionthat
rulest henot ationusedt o
communi cat et hef ixedandv ariable
cur r
enci esi naquot ation.For
exampl e, inaconv ersionfrom EUR
toAUD, EURi st hef i
x edcur r
ency ,
AUDi st hev ariabl ecur rencyandt he
exchanger atei ndicat eshowmany
Aust raliandol larswoul dbepai dor
receiv edf or1eur o.Cy prusand
Mal ta, whi chwer equot edast he
[cl
ari
fi
cati
onneeded]
base  
tot heUSDand
 when?
[ ]
other s,wer erecently  remov ed
from t hisli
stwhent heyj oined
the Eur ozone.
Insomear easofEur opeandi nt he
retailmar ketinthe Uni tedKi ngdom,
EURandGBPar erev ersedsot hat
GBPi squot edast hef i
x edcur rency
tot heeur o.Inordert odet ermine
whi chi sthef i
xedcur rencywhen
neithercur rencyisont heabov el i
st
(i
.e.bot har e"other"),mar ket
conv ent i
oni stouset hef i
x ed
currencywhi chgivesanex change
rategr eaterthan1. 000.Thi s
reducesr oundingissuesandt he
needt ouseexcessi venumber sof
deci mal places.Ther ear esome
except ionst othisrule: forexampl e,
theJapaneseof tenquot et heir
currencyast hebaset oother
currenci es.
Quot ati
onusi ngacount ry '
shome
currencyast hepr i
cecur rencyi s
knownasdi rectquot ationorpr i
ce
quot at
ion( from t hatcount ry'
s
cl
[ ar
if
icat
ionneeded]
perspectiv e)  For
exampl e, EUR0. 8989=USD1. 00in
theEur oz one[6] andi susedi nmost
count r
ies.
Quot ati
onusi ngacount ry '
shome
currencyast heuni t
[clar
if
icati
onneeded]
currency  (forex ampl e,
US$1. 11=EUR1. 00i nt heEur oz one)
i
sknownasi ndi rectquot ationor
quant i
tyquot ationandi sused
i
n Briti
sh newspaper s;itisal so
commoni n  Aust ralia, New
Zealand andt heEur ozone.
Usingdi rectquot ation, ift hehome
currencyi sst rengt heni ng( that
i
s, 
appr eci ating, orbecomi ngmor e
val
uabl e)t hent heex changer ate
numberdecr eases.Conv ersely,i
f
thef oreigncur r
encyi s
strengtheni ngandt hehome
currencyi s depr eci at
ing, the
exchanger atenumberi ncr eases.
Mar ketconv ent i
onf r
om t heear l
y
1980st o2006wast hatmost
currencypai rswer equot edt of our
deci mal placesf orspot
transact ionsandupt osi xdeci mal
placesf orf or war dout r
ight sor
swaps.( Thef our thdeci mal placeis
usual l
yr ef er redt oasa" pip").An
except iont ot hi
swasex change
rateswi thav alueofl esst han1. 000
whi chwer eusual l
yquot edt of i
veor
sixdeci mal pl aces.Al thought here
i
snof ixedr ule, ex changer ates
numer ical lygr eat erthanar ound20
wer eusual lyquot edt othr ee
deci mal placesandexchanger ates
great ert han80wer equot edt ot wo
deci mal places.Cur renci esov er
5000wer eusual l
yquot edwi t
hno
deci mal places( forexampl e,t he
formerTur kishLi ra).e. g.(GBPOMR  :
0.765432-  :1.4436-EURJPY  :
165. 29) .Inot herwor ds, quot esar e
givenwi thf ivedi gits.Wher erat es
arebel ow1, quotesf requent l
y
[7]
i
ncl udef ivedeci mal pl aces.
In2005, Bar claysCapi t albrokewi th
conv ent ionbyquot i
ngspot
exchanger ateswi thf i
v eorsi x
deci mal placesont hei relect ronic
[8]
deal i
ngpl atfor m.  
Thecont ract i
on
ofspr eads( thedi fferencebet ween
thebi dandaskr ates)ar guabl y
necessi tatedf i
nerpr i
cingandgav e
thebankst heabi litytot r
yt owi n
transact i
onsonmul ti
bankt radi ng
platfor mswher eal lbanksmay
otherwi
sehav ebeenquot ingthe
samepr ice.Anumberofot her
bankshav esi ncef oll
owedthis
[cit
ati
onneeded]
system.
Exchanger ateregime[ edit]
Mai nar ti
cle:
 Exchanger at eregime
Count ri
esar ef r
eet ochoosewhi ch
typeofex changer ateregi met hey
willappl ytotheircurrency .The
mai nt y
pesofex changer ate
regimesar e:fr
ee- f
loati
ng, pegged
(fi
xed) ,orahy brid.
Infree-floati
ngr egimes, ex change
ratesar eal l
owedt ov aryagai nst
eachot heraccor di
ngt ot hemar ket
forcesofsuppl yanddemand.
Exchanger atesf orsuchcur rencies
arelikelytochangeal most
const antlyasquot edon  financial
mar kets, mainlyby  
banks, around
thewor ld.
Amov abl eoradj ust ablepegsy st
em
i
sasy stem of  fixedexchanger at
es,
butwi thapr ovisionf ort he
revaluat ion( usual lydev aluat i
on)of
acur rency .Forex ampl e, between
1994and2005, t
he  Chinesey uan
renmi nbi  (
RMB)waspeggedt o
the Uni t
edSt atesdol l
ar  
atRMB
8.2768t o$1.Chi nawasnott heonly
count ryt odot his; fr
om t heend
of Wor ldWarI I
 unt il
1967, West ern
Europeancount riesal lmai nt ained
fi
xedex changer at eswi tht heUS
doll
arbasedont he  BrettonWoods
[
9]
system.  
Butt hatsy stem hadt obe
abandonedi nfav oroff loat ing,
mar ket -
basedr egi mesduet o
mar ketpr essur esandspecul at i
on,
accor dingt oPr esidentRi char dM.
Nixoni naspeechonAugust15,
1971,inwhati sknownasthe Nixon
Shock.
Stil
l
,somegov er
nmentsstri
veto
keeptheircurr
encywithinanarrow
range.Asar esult
,cur
renci
es
becomeov er
-val
uedorunder-v
alued,
l
eadingt oexcessivet
radedefi
cits
orsurpluses.
Exchangerat
eclassif
icat
ion[
edi
t]
From theper
specti
veofbank
forei
gnexchangetrading
 Buyingrat
e: Alsoknownas
thepurchasepr i
ce,iti
sthe
pri
ceusedbyt hef orei
gn
exchangebankt obuyf orei
gn
curr
encyfrom t hecust omer.
Ingeneral
,theex changerat
e
wher et
hefor eigncur r
encyis
convert
edt oasmal ler
numberofdomest ic
 curr
enciesisthebuyi
ngr at
e,
whichindi
cateshowmucht he
countr
y'scurr
encyisrequir
ed
tobuyacer t
ainamountof
for
eignexchange.
 Sell
i
ngr ate:Alsoknownas
thefor
eignex changesel l
ing
pri
ce,i
tref er
st otheex change
rat
eusedbyt hebankt osell
for
eignexchanget o
customers.Iti ndicateshow
mucht hecount ry'
scur rency
needstober ecov eredift he
banksellsacer tainamountof
for
eignexchange.
 Middlerate:Theaverageof
thebidpriceandtheaskpri
ce.
Commonl yusedin
newspaper s,magazi
nesor
economi canaly
sis.
Accordingtothelengt
hof
deli
veryafterf
orei
gnexchange
tr
ansact i
ons
 Spotexchanger ate:Ref ers
totheex changer ateofspot
foreignex change
transact i
ons.Thati s,af t
er
thef oreignex change
transact i
oniscompl eted,
theex changer atei nDel iver
y
wi t
hint wowor kingday s.
Theex changer atethati s
gener all
ylist
edon
the foreignexchange
mar ket  
isgener all
yr eferred
toast hespotex changer ate
unlessi tspeci f
ically
i
ndi catesthef or war d
exchanger ate.
 For
war
dexchanger
ate:
To
bedel i
v eredinacer tain
per i
odoft i
mei nthef uture,
butbef orehand, thebuy er
andt hesel lerwi llent erinto
acont ractt or eachan
agr eement .Whent he
del i
verydat eisr eached,
bot hpar t
iest ot he
agr eementwi lldelivert he
transact i
onatt heex change
rateandamountoft he
reser vation.For war df orei
gn
ex changet radi ngisan
appoi ntment -based
transact i
on, whi chi sduet o
thedi fferentt imet hef oreign
ex changepur chaserneeds
forf oreignex changef unds
andt hei ntr
oduct i
onof
foreignex changer i
sk.The
forwar dexchanger ateis
 basedont hespotex change
rate,whichisrepr esentedby
the“ pr
emium” ,“discount”,
and“ pari
ty”ofthespot
exchanger ate.
Accordingtothemet hodof
set
ti
ngt heexchanger ate
 Basicrat e:Usual lychoose
akeyconv ert i
blecur rency
thatisthemostcommonl y
usedi ninternat i
onal
economi ctransact i
onsand
account sfort hel ar gest
proportionoff oreign
exchanger eser v
es.
Compar eitwi tht he
currencyoft hecount ry
andsett heexchanger ate.
Thisex changer at ei sthe
basicex changer at e.The
keycur rencygener ally
 ref
erstoawor ldcurr
ency,
whichiswi delyusedfor
pri
cing,settl
ement,reserv
e
curr
ency ,f
reelyconvert
ibl
e,
andinternati
onall
y
acceptedcur r
ency.
Cr ossr ate: Af t
ert hebasi c
ex changer atei swor ked
out ,theex changer ateof
thel ocal cur r
encyagai nst
otherf oreigncur r
enci es
canbecal cul atedt hrough
thebasi cexchanger at e.
Ther esultingex change
ratei sthecr ossex change
rate.
Othercl assificat i
ons[ edit]
Accor dingt ot hepay ment
methodi nf oreignexchange
tr
ansact i
ons
  Tel
egr
aphi
cex
change
rat
e
 Mai
ltr
ansf
err
ate
 Demanddraftr
ate
Accordi
ngtothelevel
of 
forei
gnexchangecont
rol
s
 Offi
cialr
ate: Theoff
ici
al
exchanger ateisthe
rat
eofexchange
announcedbya
country'
sforeign
exchange
administr
ation.Usuall
y
usedbycount ri
eswith
str
ictfor
eignexchange
control
s.
 Marketrat
e: Themar ket
exchanger at
erefer
st o
therealexchangerate
 fort r
adingf or
eign
exchangei nthefree
mar ket.Itfl
uctuates
wi t
hchangesi nforeign
exchangesuppl yand
demandcondi t
ions.
Accor dingtot he
i
nternat i
onalexchanger ate
regi
me
 Fixedexchanger ate:I
t
meanst hatthe
exchangerate
betweenacount ry's
currencyandanot her
country'
scurrencyis
basicall
yfi
xed,and
thefluct
uati
onof
exchangerateisv ery
smal l
.
 Fl
oat
ingexchange
 rate:Itmeanst hatt he
monet aryauthor it
ies
ofacount rydonot
sti
pul atetheof fici
al
exchanger ateoft he
count ry'
scur rency
againstot her
currencies, nordoesi t
hav eanyupperor
l
owerl imitof
exchanger ate
fl
uct uations.Thel ocal
currencyi s
deter minedbyt he
suppl yanddemand
rel
at i
onshi poft he
foreignex change
mar ket ,
andi tisf r
ee
tor i
seandf all.
Whether infl
ation is
i
ncl
uded
  Nomi nalexchange
rat
e: anexchange
rat
et hati
sof f
ici
all
y
announcedor
mar ket
edwhi ch
doesnotconsi der
i
nflati
on.
 Realexchangerate:
Thenomi nal
exchangerate
el
iminati
nginfl
ati
on
Factorsaff
ecti
ngt he
changeofex change
rat
e[edit
]
1.
Balanceof
payment s:
Whena
countryhasalarge
i
nternati
onal
bal
anceof
payment sdef
ici
tor
 tradedef icit
,it
meanst hati t
s
forei gnexchange
ear ningsar eless
thanf oreign
ex change
ex pendi turesand
i
tsdemandf or
forei gnexchange
ex ceedsi tssupply,
soi tsf oreign
ex changer ate
ri
ses, andi ts
cur rency
depr eciat es.
2.
Inter
estratelevel
:
Int
erestratesare
thecostandpr ofi
t
ofborrowing
capit
al.Whena
countryr
aisesits
 i
nterestr ateori ts
domest icinterest
rateishi ghert han
thefor eignint er
est
rate,itwi l
lcause
capital i
nflow,
therebyi ncreasing
thedemandf or
domest iccur r
ency ,
all
owi ngt he
currencyt o
appreci ateandt he
foreignexchange
depreci ate.
3.
Infl
ati
onf actor
:
Theinfl
ati
onr ate
ofacount ryri
ses,
thepurchasing
powerofmoney
decl
ines,thepaper
curr
ency
 depreci ates
i
nternal ly,andt hen
thefor eign
currency
appreci ates.Ifboth
count ri
eshav e
i
nflation, t
he
currenci esof
count ri
eswi t
hhi gh
i
nflationwi l
l
depreci ateagai nst
thosewi thlow
i
nflation.Thel att
er
i
sar elative
revaluat i
onoft he
former .
4.
Fiscaland
monet ar
ypolicy
:
Al
thought he
i
nfluence
of 
monet ary
poli
cy ont he
exchanger ate
changesofa
country '
s
governmenti s
i
ndirect ,i
tisal so
veryimpor tant .In
general ,t
hehuge
fi
scal revenueand
expendi tur
edef ici
t
causedby
expansi onaryf iscal
andmonet ary
poli
ciesand
i
nflati
onwi ll
devaluet he
domest i
ccur rency .
Thet i
ght ening
fi
scal and
monet ar ypolicies
wil
l r
educef iscal
 expenditures,
stabil
izethe
currency,and
i
ncreaset hevalue
ofthedomest ic
currency.
5.
Vent ur ecapi tal:I
f
specul atorsex pect
acer taincur rency
toappr eciat e, they
willbuyal ar ge
amountoft hat
currency ,whi chwi l
l
causet he
exchanger ateof
thatcur rencyt o
ri
se.Conv er sel y,i
f
specul atorsex pect
acer taincur rency
todepr eciat e, they
willselloffal ar ge
 amountoft he
currency,resulti
ng
i
nspecul ation.The
currencyex change
rat
ei mmedi ately
fal
l.Speculationis
animpor tantf act
or
i
nt heshor t-
term
fl
uctuati
onsi nt he
exchanger ateof
theforei
gn
exchangemar ket
.
6.
Gov ernment
mar keti nter
venti
on:
Whenex change
ratef l
uct uat
ionsin
thef oreign
ex changemar ket
adv erselyaffecta
count ry'
seconomy ,
trade, orthe
gover nmentneeds
toachi ev ecer tain
poli
cygoal s
thr
oughex change
rat
eadj ust ment s,
monet ary
author iti
escan
parti
ci pat ein
currencyt rading,
buyingorsel li
ng
l
ocal orf oreign
currenci esi nlarge
quant iti
esi nt he
mar ket .The
for
ei gnexchange
suppl yand
demandhas
causedt he
exchanger atet o
change.
7.
Economi
cst
rengt
h
 ofacount ry:In
gener al, high
economi cgr owt h
ratesar enot
conduci vet ot he
l
ocal cur rency '
s
perfor mancei nthe
foreignexchange
mar keti nt heshor t
term, buti nt he
l
ongr un, they
strongl ysuppor t
thest rong
moment um oft he
l
ocal cur rency .
Emergingmar ket s[edit
]
Researchon  target
zones hasmai nly
concentratedont he
benefi
tofst abi l
ityof
exchanger at esf or
i
ndust ri
alcount ri
es, but
somest udieshav e
arguedt hatv olat
ile
bil
ateralex changer ates
betweeni ndust ri
al
count r
iesar ei npar t
responsiblef orfi
nanci al
cri
sisinemer ging
mar kets.Accor dingt o
thi
sv iewt heabi l
ityof
emer gingmar ket
economi est ocompet eis
weakenedbecausemany
ofthecur renci esar etied
totheUSdol larinv ari
ous
fashionsei theri mplicit
ly
orex pli
cit
ly, so
fl
uctuat i
onssuchast he
appreciati
onoft heUS
doll
art othey enor
deutscheMar khav e
contri
but edt o
destabilizingshocks.
Mostoft hesecount ri
es
arenetdebt orswhose
debtisdenomi natedin
oneoft he  G3
[10]
curr
enci es.
InSept ember2019
Argent i
nar est ri
ctedt he
abil
it
yt obuyUS
doll
ars. Maur ici
oMacr i
 i
n
2015campai gnedona
promi set ol i
ft
rest
rictionsputi npl ace
bythel ef t-
wi ng
governmenti ncluding
the 
capi tal
controls whi chhav ebeen
usedi nAr gent i
nat o
manageeconomi c
i
nstabi l
ity.Wheni nflati
on
roseabov e20per cent
transactions
denomi nat edi ndol lars
becamecommonpl ace
asAr gent i
niansmov ed
awayf r
om usi ngt he
peso.I n2011t he
gov ernmentof  Cristina
Fernándezde
Kirchner restri
ct edt he
purchaseofdol lars
l
eadi ngtoar isei nbl ack
mar ketdol l
arpur chases.
Thecont rolswer erol l
ed
backaf terMacr i t
ook
officeandAr gent ina
i
ssueddol l
ar
denomi nat ed bonds, but
whenv ariousf act orsled
toal ossi nthev alueof
thepesor elativet ot he
doll
arleadi
ngtothe
rest
orati
onofcapital
contr
olstoprevent
addit
ional 
depr
eciati
on  a
[
11]
midstpesosell
offs.
Fluctuationsi nexchange
rates[edit]
Amar ket-based
exchanger atewi ll
changewhenev erthe
valuesofei theroft he
twocomponent
currencieschange.A
currencybecomesmor e
valuablewhenev er
demandf oritisgr eat
er
thant heav ailablesupply.
Itwillbecomel ess
valuablewhenev er
demandi sl esst han
availablesuppl y( t
his
doesnotmeanpeopl eno
l
ongerwantmoney ,it
j
ustmeanst heyprefer
holdingt heirweal t
hi n
someot herform,
possi blyanot her
cur r
ency ).
Increaseddemandf ora
cur r
encycanbeduet o
eitherani ncreased
transact i
on demandf or
money  orani ncreased
specul ativedemandf or
money .Thet r
ansaction
demandi shighly
cor r
elatedt oacount r
y's
l
ev elofbusi nessact ivi
ty,
grossdomest icproduct
(GDP) ,andempl oyment
l
ev els.Themor epeople
thatar e unempl oyed,the
l
esst hepubl i
casa
whol ewi llspendon
goodsand
ser vices. Cent ral
banks  typicall
yhav elittl
e
difficultyadj ustingt he
av ailablemoneysuppl y
toaccommodat e
changesi nt hedemand
formoneyduet o
busi nesst ransact ions.
Specul ativedemandi s
muchhar derf orcent ral
bankst oaccommodat e,
whi cht heyi nfl
uenceby
adj ust i
ng interestr ates.
Aspecul atormaybuya
cur rencyi ft her eturn
(thati st hei nt
er estrate)
i
shi ghenough.I n
gener al,thehi ghera
count ry'
si nterestr ates,
thegr eat erwi ll
bet he
demandf ort hatcur rency.
Ithasbeenar gued[by
whom?]
 thatsuch
specul ationcan
under mi ner eal economi c
growt h,inpar ti
cul ar
sincel argecur rency
specul ator smay
deliberat elycr eat e
downwar dpr essur eona
currencybyshor tingi n
ordert of or cet hat
cent r
al bankt obuyt heir
owncur r encyt okeepi t
stable.(Whent hat
happens, thespecul ator
canbuyt hecur r ency
backaf teri tdepr eciates,
closeoutt heirposi ti
on,
andt herebymakea
[ci
tat
ionneeded]
profi
t.)
For 
car ri
er
compani es  shipping
goodsf r
om onenat ionto
another ,ex changer ates
canof teni mpactt hem
severely.Ther ef ore,most
carr
iershav e
a CAF char get oaccount
forthese
[
12]
[13]
fl
uctuat i
ons.
Purchasingpowerof
currency[
edit]
The realexchange
rat
e  (
RER)ist he
purchasingpowerofa
currencyrelati
veto
anotheratcur rent
exchanger atesand
pri
ces.I tist her atioof
thenumberofuni tsofa
givencount r
y '
scur rency
necessar yt obuya
mar ketbasketofgoods
i
nt heot hercount ry,after
acqui r
ingt heot her
count r
y '
scur rencyi nt he
for
ei gnexchangemar ket,
tothenumberofuni tsof
thegi vencount ry's
currencyt hatwoul dbe
necessar yt obuyt hat
mar ketbasketdi rectlyin
thegi vencount ry.Ther e
arev ariousway st o
[14]
measur eRER.
Thust her eal ex change
rat
ei st heex changer ate
ti
mest her elativepr ices
ofamar ketbasketof
goodsi nt het wo
count ries.Forex ampl e,
thepur chasi ngpowerof
the USdol lar r
elativeto
thatoft he euro ist he
doll
arpr iceofaeur o
(dollarspereur o)t imes
theeur opr iceofoneuni t
ofthemar ketbasket
(euros/ goodsuni t
)
divi
dedbyt hedol larpri
ce
ofthemar ketbasket
(dollarspergoodsuni t)
,
andhencei s
dimensi onless.Thi si
s
theexchanger ate
(expr essedasdol larsper
euro)t imest her elati
ve
pri
ceoft het wo
currenci esi ntermsof
theirabi li
tyt opur chase
unitsoft hemar ket
basket( eurospergoods
unitdi vi
dedbydol larsper
goodsuni t
).I
fal lgoods
wer ef r
eel y 
tr
adabl e,and
foreignanddomest ic
resident spurchased
i
dent ical basketsof
goods,  purchasi ngpower
parity (
PPP)woul dhol d
fortheexchanger at e
and GDPdef l
ator s (price
l
ev els)oft het wo
count ri
es, andt her eal
exchanger at
ewoul d
alway sequal 1.
Ther ateofchangeoft he
realex changer ateov er
ti
mef ort heeur ov er sus
thedol larequal st her ate
ofappr eci ati
onoft he
euro( t
hepositiv
eor
negativepercentager ate
ofchangeoft hedol lars-
per-euroexchanger ate)
plusthe i
nfl
ationrate of
theeur ominust he
i
nf l
ati
onrateoft hedol lar
.
Real exchanger ate
equil
ibrium and
misalignment [edi t
]
TheReal ExchangeRat e
(RER)r epr esent st he
nomi nal ex changer ate
adjustedbyt her elati
v e
pri
ceofdomest i
cand
forei
gngoodsand
servi
ces, thusr eflecting
thecompet iti
v enessofa
count r
ywi thr espectt o
therestoft he
[
15]
wor l
d.  
Mor ei ndet ail
,
anappr eciationoft he
currencyorahi ghl ev el
ofdomest icinfl
at ion
reducest heRER, thus
reducingt hecount r y's
compet it
ivenessand
l
ower i
ngt heCur rent
Account( CA) .Ont he
otherhand, acur rency
depr eciati
ongener at es
anopposi teef fect ,
i
mpr ovingt hecount ry's
[16]
CA.
Ther eisev i
dencet hat
theRERgener all
y
reachesast eadyl ev elin
thelong- term, andt hat
thi
spr ocessi sf ast eri n
smal lopeneconomi es
char acterizedbyf ixed
[
16]
exchanger ates.  Any
subst ant ial and
per sistentRERdev iat
ion
from i tsl ong- run
equi li
br ium l evel,theso-
calledRERmi salignment ,
hasshownt opr oduce
negat ivei mpact sona
count ry'sbal anceof
[
17]
pay ment s.  
An
ov erval uedRERmeans
thatt hecur rentRERi s
abov ei tsequi libri
um
value, wher easan
under val uedRER
i
ndi cat est he
[18]
cont rar y.  Speci fical
ly,a
prol ongedRER
ov erval uat ioni swi del
y
consi der edasanear l
y
signofanupcomi ng
crisis, duet ot hef actthat
thecount r
ybecomes
vulnerablet obot h
specul ati
veat t
acksand
currencycr isis,as
happenedi nThai land
duringt he 1997Asi an
[19]
fi
nanci alcrisis.  Ont he
othersi de,apr ot racted
RERunder v aluation
usual l
ygener ates
pressur eondomest i
c
pri
ces, changi ngt he
consumer s’ consumpt ion
i
ncent ivesand, so,
misal l
ocatingr esour ces
betweent radabl eand
[
17]
non-t r
adabl esect or s.
Givent hatRER
misal i
gnmentand, in
particularov ervaluat i
on,
canunder mi net he
country'sexpor t-oriented
developmentst r
ategy ,
theequi li
brium RER
measur ementi scr ucial
for
[
15]
poli
cymaker s.  Unf ortu
nately,thisv ariable
cannotbeobser ved.The
mostcommonmet hodin
ordertoest i
mat et he
equili
brium RERi st he
universallyaccept ed
Purchasi ngPowerPar i
ty
(PPP)t heor y,accor ding
towhi cht heRER
equili
brium lev el is
assumedt or emai n
constantov ert ime.
Nev er
thel ess, the
equili
brium RERi snota
fi
xedv alueasi tfollows
thetrendofkey
economi c
[
15]
fundament als,  suchas
dif
ferentmonet aryand
fi
scal pol i
ciesor
asymmet r
icalshocks
betweent hehome
countryand
[
16]
abroad.  Consequent ly
,
thePPPdoct ri
nehas
beenl argelydebat ed
duri
ngt hey ears,given
thatitmaysi gnal a
natural RERmov ement
towardsi t
snew
equil
ibrium asaRER
misalignment .
Start
ingf r
om the1980s,
i
nor dert oov ercomet he
l
imitationsoft hi s
approach, many
resear cher st ri
edt ofind
someal ternat i
ve
equi l
ibrium RER
[15]
measur es.  
Twooft he
mostpopul ar
appr oachesi nthe
economi cliteraturear e
theFundament al
Equi l
ibrium Exchange
Rat e(FEER) , developed
byWi ll
iamson
[
20]
(1994) ,  
andt he
Behav i
our al Equili
br i
um
ExchangeRat e(BEER) ,
i
nitiall
yest i
mat edby
ClarkandMacDonal d
[
21]
(1998) .  TheFEER
focusesonl ong-run
deter mi nant soft heRER,
rathert hanonshor t-
term
cyclical andspecul at
iv e
 [
21]
forces.   Itr epr esent sa
RERconsi st entwi th
macr oeconomi cbal ance,
charact erizedbyt he
achiev ementofi nternal
andex ternal bal ancesat
thesamet i
me.I nter nal
balancei sr eachedwhen
thelev el ofout puti sin
l
inewi thbot hf ul l
empl oy mentofal l
avail
abl ef act orsof
product ion, andal ow
andst abl er at eof
[21]
i
nflation.   Ont heot her
hand, ex ternal bal ance
holdswhenact ual and
futureCAbal ancesar e
compat iblewi t
hl ong-
term sust ainabl enet
capital
 [
22]
fl
ows.   Nev ertheless,
theFEERi sv i
ewedasa
normat i
vemeasur eof
theRERsi ncei tisbased
onsome“ i
deal ”
economi ccondi ti
ons
rel
atedt ointer naland
externalbalances.
Parti
cularly,sincet he
sustainableCAposi tion
i
sdef inedasan
exogenousv alue, this
approachhasbeen
broadlyquest i
onedov er
ti
me.Bycont rast,the
BEERent ai l
san
economet ri
canal ysi sof
theRERbehav iour,
consideringsi gnifi
cant
RERdev i
ationsf r
om i ts
PPPequi libri
um l ev elas
aconsequenceof
changesi nkeyeconomi c
fundament als.Accor ding
tothi smet hod, theBEER
i
st heRERt hatresults
whenal l t
heeconomi c
fundament alsar eattheir
equi li
brium
[
16]
values.  Ther efore,the
total RERmi sali
gnment
i
sgi venbyt heext entt o
whi checonomi c
fundament alsdi ff
erfrom
theirlong- runsust ai
nable
l
ev els.Inshor t,theBEER
i
samor egener al
appr oacht hant heFEER,
sincei tisnotl i
mi tedto
thel ong- t
er m
perspect i
ve, beingabl eto
expl ainRERcy cli
cal
 [
21]
mov
ement
s.
Bi
later
alvs.eff
ect
ive
exchangerate[
edi
t]

Exampl eofGNP-
weightednomi nal
exchanger atehistoryof
abasketof6i mpor tant
currencies( USDol lar,
Euro,JapaneseYen,
ChineseRenmi nbi
,
SwissFr anks, Pound
Sterli
ng
Bil
ateralexchanger ate
i
nvolvesacur r
encypai r,
whil
ean  effective
exchanger at e 
isa
weight edav erageofa
basketoff oreign
currencies, andi tcanbe
vi
ewedasanov erall
measur eoft hecount ry'
s
external compet iti
veness.
Anomi nal effect i
v e
exchanger ate( NEER)i s
weight edwi tht hei nv erse
oftheasy mpt ot i
ct rade
weight s.Ar eal ef f
ect ive
exchanger ate( REER)
adjustsNEERby
appropr i
atef orei gnpr i
ce
l
evel anddef l
at esbyt he
homecount rypr ice
[
14]
l
evel .  Compar edt o
NEER, aGDPwei ghted
eff
ect i
v eexchanger ate
mightbemor e
appropr i
ateconsi dering
thegl
obali
nvest
ment
phenomenon.
Par all
elex change
rate[edit]
Inmanycount r
iest here
i
sadi stinctionbetween
theof fi
cial exchanger at
e
forper mi t
ted
transact i
onsand
a parallelexchange
rate thatrespondst o
ex cessdemandf or
foreigncur r
encyatt he
offici
al exchanger ate.
Thedegr eebywhi cht he
par al
lelex changer at e
ex ceedst heof fi
cial
ex changer atei
sknown
ast hepar al l
el
[
23]
premi um.