Exchange rate facts for kids

An exchange rate, also called a foreign exchange rate, tells you how much one country's currency is worth compared to another country's money. It's like a price tag for money! For example, an exchange rate might tell you how many US dollars you can get for one Euro. This rate is super important when people travel, buy things from other countries, or do business across borders.

Exchange rates are always changing. They can go up or down for many different reasons, like how fast prices are rising in a country (this is called inflation). For a big part of the 1900s, a system called the Bretton Woods system kept exchange rates mostly fixed, meaning they didn't change much.

What is an Exchange Rate?

Imagine you're going on a trip from the United States to Mexico. You have US dollars, but in Mexico, you need pesos to buy things. The exchange rate tells you how many pesos you can get for each dollar. If the exchange rate is 1 US dollar = 20 Mexican pesos, it means one dollar is worth 20 pesos.

Why are Exchange Rates Important?

Exchange rates affect many parts of our lives, even if we don't always notice them.

• For Travelers: If you travel to another country, you need to change your home currency into the local currency. The exchange rate decides how much local money you get. A good exchange rate means your money goes further!
• For Shoppers: When you buy something online from a store in another country, the price is often shown in their currency. The exchange rate helps you figure out how much it will cost in your own money.
• For Businesses: Companies that buy and sell goods internationally rely on exchange rates. If the exchange rate changes a lot, it can make their products more or less expensive for buyers in other countries.

How Exchange Rates Change

Exchange rates are not set in stone; they move up and down all the time. This is because they are part of a huge global market called the foreign exchange market, or "forex" for short. Here are some of the main reasons why exchange rates change:

Supply and Demand

Just like anything else, the value of a currency depends on how many people want to buy it (demand) and how much of it is available (supply).

• If many people or businesses want to buy a certain currency, its value usually goes up.
• If many people want to sell a certain currency, its value usually goes down.

Inflation Rates

Inflation means that prices for goods and services are generally rising in a country.

• If a country has high inflation compared to others, its currency might become less valuable. This is because your money buys less in that country.
• People might prefer to hold currencies from countries with lower inflation, making those currencies stronger.

Interest Rates

Interest rates are set by a country's central bank (like the Federal Reserve in the US).

• If a country's central bank raises interest rates, it can make that country's currency more attractive to investors. This is because they can earn more money by saving or investing there.
• More investors wanting to put their money in that country means more demand for its currency, which can make its value go up.

Economic Stability

The overall health and stability of a country's economy also play a big role.

• If a country's economy is strong and growing, its currency tends to be more stable and valuable.
• If there's political uncertainty or economic problems, investors might worry and sell off that country's currency, making its value drop.

Fixed vs. Floating Exchange Rates

There are two main types of exchange rate systems that countries use:

Floating Exchange Rates

Most major currencies today, like the US dollar, Euro, and Japanese Yen, use a floating exchange rate system.

• This means their value is mostly decided by the forces of supply and demand in the global market.
• The government or central bank usually doesn't try to control the exact value of the currency. It lets the market decide.
• This system allows exchange rates to change constantly, reflecting economic changes around the world.

Fixed Exchange Rates

In a fixed exchange rate system, a country's government or central bank sets the value of its currency against another major currency (like the US dollar) or against a valuable item like gold.

• The government then works to keep the exchange rate at that set value. They might buy or sell their own currency to maintain the fixed rate.
• The Bretton Woods system, which was used for much of the 20th century (from 1944 to 1971), was a famous example of a fixed exchange rate system. Under this system, the US dollar was fixed to gold, and other currencies were fixed to the US dollar.
• Some smaller countries or those with developing economies still use fixed exchange rates to try and keep their economy more stable.

How to Find Exchange Rates

You can easily find current exchange rates using various tools:

• Online Converters: Many websites and apps offer real-time currency converters.
• Banks and ATMs: Banks and ATMs will show you the exchange rate they are offering when you exchange money or withdraw cash in a foreign currency.
• Financial News: Financial news websites and TV channels often report on major exchange rates.

It's always a good idea to check the exchange rate before you travel or make international purchases so you know how much your money is truly worth.

Images for kids

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  USD, EUR and Romanian leu

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  Exchange rates display in Thailand

See also

In Spanish: Tasa de cambio para niños