What are foreign currency exchange rates?

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Foreign currency exchange rates: GBP/EUR graph

We will start with a short explanation of exchange rates are and why they are constantly changing. If you are familiar with exchange rates skip onto the next section.

An exchange rate is the price tag for one currency unit if you wish to buy that unit using a different currency. In this respect exchange rates are no different to the price tags for ordinary products you find in shops and supermarkets.

Currencies are traded on the international foreign exchange market on a continuous basis and in staggeringly large volumes (the value of daily transactions is around 1.6 trillion Dollars). In the very short-term currency exchange rates move in a random way in response to immediate levels of supply and demand. In the medium term exchange rates reflect the differentials in interest rates between currencies, and in the long term they reflect the differentials in inflation rates between economies. However all you really need to understand is that currencies are sold by various types of currency dealers such as banks or currency brokers, that exchange rates are constantly changing (they change every 2 seconds) and that in the short term it is impossible to predict with any certainty which way they are going to move.

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