Exchange rates are central to global business, with global foreign exchange (FX) trading reaching $9.6 trillion per day in 2025. They shape how money moves between countries and how value is preserved or lost along the way. If you’ve ever converted one currency into another, priced products for international customers, or reported revenue earned abroad, you’ve relied on an exchange rate to make it work.

Below, we discuss what an exchange rate means, how exchange rates work in practice, and why even small shifts can have an outsized impact on international operations.

What’s in this article?

• What is an exchange rate?
  
• How does an exchange rate work?
  
• How are exchange rates quoted?
  
• What do bid and ask exchange rates mean?
  
• What are the main types of exchange rates?
  
• What factors influence exchange rates?
  
• Why do exchange rates matter for businesses?
  
• How Stripe Payments can help
  

What is an exchange rate?

An exchange rate is the price of one currency measured in another currency. It tells you how much of currency B you’ll receive for one unit of currency A.

How does an exchange rate work?

Exchange rates rise or fall based on how much demand there is for a currency relative to others. They’re set in the foreign exchange (FX) market, which is a global, decentralized market where banks, financial institutions, businesses, and investors trade currencies around the clock. As a result, exchange rates constantly change in response to economic data, central bank decisions, geopolitical events, and shifts in market sentiment.

How are exchange rates quoted?

Exchange rates are quoted in a standardized way so buyers, sellers, and systems around the world can interpret them consistently. This supports reliable use of exchange rates in trading, accounting, pricing, and payment systems.

Here’s how it works:

• Currency pairs: Exchange rates are always shown as pairs because a currency’s value only exists in relation to another currency. A quote such as EUR/USD shows how many US dollars are needed to buy one euro.

• Base currency: The first currency in a pair is the base currency and represents a single unit. The exchange rate tells you how much of the second currency the first unit is worth.

• Quote currency: The second currency in the pair is the quote currency, which expresses the value of the base currency. If EUR/USD is 1.10, the quote currency (USD) tells you that 1 euro costs $1.10.

• Standard currency codes: Currencies are identified using three-letter International Organization for Standardization (ISO) codes (e.g., USD for US dollars, EUR for euros, JPY for Japanese yen). These codes remove ambiguity and make exchange rates readable across markets and systems.

A direct quote shows how much local currency is needed to buy one unit of a foreign currency. An indirect quote shows the opposite.

What do bid and ask exchange rates mean?

The bid rate is the price a buyer is willing to pay for a currency. If you’re exchanging a foreign currency back into your home currency, this is the rate you’ll receive.

The ask rate is the price a seller is willing to accept for a currency. If you’re buying a foreign currency, this is the rate you’ll pay.

The midmarket rate sits between the bid and ask rates. It reflects the underlying market value of the currency pair without added markup. The difference between the bid and ask rates is called the spread. It represents the cost of the exchange and the margin built into the transaction.

Currency providers take on risk when rates move between the time they quote a price and complete a transaction. The spread compensates for that risk and for operating costs. A wider spread means a less favorable rate for the person exchanging money. Even small differences in spreads can materially affect costs over time for businesses handling large or frequent conversions.

What are the main types of exchange rates?

How a currency’s value is set depends on the exchange rate system a country uses and how much control its central bank chooses to exert. The exchange rate regime affects economic stability, inflation control, and trade competitiveness. It also shapes how predictable currency movements are for businesses operating across borders.

Here are the main types of exchange rates and how they’re determined.

Floating exchange rates

Floating exchange rates move freely based on supply and demand in the foreign exchange market. Most major global currencies use this system, which allows rates to adjust quickly as economic conditions and market expectations change.

Fixed exchange rates

Fixed exchange rates are pegged to another currency, a basket of currencies, or another reference value. Governments or central banks actively maintain the peg by intervening in currency markets or adjusting monetary policy.

Pegged exchange rates

A pegged system is a specific type of fixed exchange rate tied to a single foreign currency, often the US dollar. This approach is commonly used to provide stability in trade and inflation, especially for smaller or export-dependent economies.

Managed floating exchange rates

In a managed float, the currency generally follows market forces, but the central bank steps in when movements become too volatile. This allows for flexibility while still giving policymakers some control over extreme swings.

Official versus market exchange rates

Some countries maintain an official exchange rate set by the government alongside a market-driven rate used in practice. Large gaps between these rates can signal economic stress and often lead to distortions in trade and capital flows.

What factors influence exchange rates?

Exchange rates reflect how markets interpret economic strength, policy decisions, and risk. The following factors often influence their fluctuations.

Interest rates

Higher interest rates tend to make a currency more attractive because they offer better returns on deposits and investments. When rates rise relative to other countries, demand for that currency often increases.

Inflation

Lower inflation generally supports a stronger currency because purchasing power holds up better over time. High inflation weakens a currency by eroding real value and reducing investor confidence.

Economic growth and stability

Strong, predictable economic growth attracts foreign investment, which increases demand for the local currency. Weak growth, recessions, or political instability usually push capital elsewhere.

Trade balances

Countries that export more than they import create steady demand for their currency since foreign buyers need it to pay for goods and services. Persistent trade deficits can have the opposite effect.

Government debt and fiscal policy

Large deficits or rising debt levels can pressure a currency if investors worry about inflation, repayment risk, or long-term economic management.

Market expectations and sentiment

Exchange rates often move on expectations before conditions actually change. Anticipated policy shifts, economic data releases, or geopolitical events can drive currency moves based on what traders think will happen next.

Global risk appetite

In periods of uncertainty, investors tend to move capital toward currencies seen as safer. When risk appetite returns, capital often flows back into higher-yielding or growth-oriented currencies.

Central bank communication

What central banks say can matter almost as much as what they do. Signals about future policy direction frequently move exchange rates well ahead of actual decisions.

Why do exchange rates matter for businesses?

Exchange rates affect how much it costs to sell or source goods internationally. A shift in currency values can widen margins or erase them, even when unit prices stay the same. Businesses earning revenue in foreign currencies eventually have to convert that money back into a home currency, and exchange rate movements can significantly change how much that revenue is worth by the time it’s settled or reported. Volatile exchange rates make it harder to forecast expenses and cash flow, especially when paying overseas suppliers or contractors. This uncertainty can complicate budgeting and long-term planning.

Currency movements also influence how prices compare across markets. A weaker local currency can make exports more attractive abroad, while a stronger one can make products feel more expensive to international customers. Pricing customers in their local currency removes friction and reduces surprise conversion costs. This often improves trust and conversion rates, particularly in cross-border commerce.

Finally, exchange rates affect how foreign assets, liabilities, and earnings appear on financial statements. Even stable operations can show volatility once results are translated into a reporting currency.

Payments providers such as Stripe support payments in local currencies and handle conversion using market-based exchange rates. This simplifies cross-border transactions without forcing businesses to manually manage currency mechanics.

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