Definition of Currency Exchange

This time we will discuss the meaning of currency exchange rates and the types, factors that affect exchange rates and also their impact on business. Here’s the explanation …

Table of contents :

Definition of Exchange Rate

Types of Exchange Rates

1. Selling Rate
2. Buying rate
3. Middle Rate

Factors Affecting Exchange Rates

1. Government Policy
2. Inflation Rate
3. Differences in Interest Rates
4. Balance of Payments Activities
5. Relative Income Level
6. Expectations

The Effect of Exchange Rates on Business

1. The Effect of Exchange Rates on Importers
2. The Effect of Exchange Rates on Exporters
3. The Effect of Exchange Rates on Accounts Receivable
4. The Effect of Exchange Rates on Owners of Dollars

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Definition of Exchange Rate

Exchange (exchange rate) in general is the value or price of a country’s currency which is measured or expressed in the currency of another country.

The definition of exchange rate  (exchange rate) can also be interpreted as an agreement known as the exchange rate of currency against a current or future payment between two different currencies.

The word ” kurs ” may not be a foreign term to us. However, in practice, there are still many who do not know the meaning of exchange rates and their effect on the business economy.

Several experts in economics have explained the definition of exchange rates, including:

According to Fabozzi and Franco

An exchange rate is the amount of one currency that can be exchanged per unit of another currency, or the price of one currency in another currency.

According to Ekananda

Exchange rate is the price of a country’s currency relative to another country’s currency. Currency values ​​play an important role in spending decisions, because exchange rates allow us to translate prices from different countries into the same language.

According to Paul R Krugman and Maurice

Exchange rate is the currency price of a country which is measured or expressed in the currency of another country.

meaning of exchange rate

Types of Exchange Rates

For those who travel abroad frequently or who have businesses in the field of international trade, they must be experienced in exchanging terms.

Exchange rate is the price of a country’s currency which is measured in units of the currency of another country.

The exchange rate is very important to know when making decisions, for example to shop abroad or sell goods abroad.

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Simply put, the meaning of exchange rate is the ratio or comparison of the exchange rate of a country with other countries.

1. Selling Rate

The definition of the selling rate is where a bank or a forex trader buys foreign currency . This includes if you want to exchange foreign currency into your country’s currency.

This can also be referred to as the prevailing exchange rate if a forex trader buys currency from another country.

2. Buying rate

The definition of a buying rate is where a bank or foreign exchange trader sells foreign currency. For example, if you want to exchange Indonesian currency (Rupiah) with American currency (Dollar).

3. Middle Rate

The definition of the middle rate is the term used for a combination of buying and selling rates. So the selling rate plus the buying rate is then divided by two (average).

Factors Affecting Exchange Rates

1. Government Policy

Various policies made by the government of a country will affect the exchange rate of the currency in that country. This policy serves as a control for:

1. Avoid various barriers to foreign currency exchange rates
2. Avoid various barriers to international trade
3. Attempts to interfere in the money market by buying and selling currencies. This market intervention is usually carried out for the following reasons:

Facilitating changes in domestic currency exchange rates

Conditions for the exchange rate of domestic currency at predetermined limits

Responding to temporary obstacles

To influence macro variables, such as inflation, income levels, and interest rates

2. Inflation Rate

In the foreign exchange market, the main basis is international trade, both in the form of services and goods.

Thus, changes in domestic prices relative to foreign prices are a factor that influences movements in the value of foreign currencies.

As an example; China is Indonesia’s trading partner. China experiences high inflation which causes higher prices for goods. This will automatically result in a decrease in demand for the relative product.

Purchasing power parity serves as a point of exchange that reflects the law of value. This is the reason why inflation will have an impact on a country’s currency exchange rate.

Also Read:   Understanding the International Balance of Payments

Inflation in a country will cause a decline in the domestic currency, and vice versa. (Read: Definition of Inflation )

3. Differences in Interest Rates

International capital flows are influenced by changes in a country’s interest rates. In other words, an increase in interest rates will attract foreign capital.

Interest rates will inevitably affect the operations of the foreign exchange market and money market. When transaction activities occur, banks will consider the differences in interest rates on national and global capital markets with a viewpoint of profit.

Banks prefer to get cheap loans on the foreign exchange market with lower interest rates and place foreign currency on the domestic credit market if interest rates are higher.

4. Balance of Payments Activities

Currency exchange rates can also be affected by the balance of payments. An active balance of payments can increase the value of the domestic currency as the number of foreign debtors increases.

If the balance of payments is passive, this will result in a decrease in the domestic currency exchange rate so that the debtor will sell everything in foreign currency to pay their external obligations.

The impact of the balance of payments is measured against the exchange rate which is determined by the level of economic openness.

Import restrictions, changes in tariffs, trade quotas, and subsidies will affect the trade balance. (Also Read:  Understanding the International Balance of Payments )

5. Relative Income Level

The rate of income growth relative to foreign prices is another factor affecting supply and demand on the foreign exchange market. The foreign currency exchange rate will weaken when the domestic income growth rate improves.

6. Expectations

Expectation of a country’s currency exchange rate in the future is also a factor that influences foreign currency exchange rates.

Like other financial markets, the forex market will react quickly to news that is thought to have an impact on the future.

For example, news about a predicted increase in inflation in the United States will likely encourage forex traders to sell against the dollar.

This is because it is estimated that the dollar price will fall in the future. And this reaction will immediately depress the dollar exchange rate on the market.

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The Effect of Exchange Rates on Business

As mentioned in the terms of the exchange rate above, the objective is to measure the value of one currency against another.

So that changes in the value of the exchange rate will certainly affect businesses related to international trade (export-import) that involve foreign currencies.

Here are some of the effects of exchange rates on business:

1. The Effect of Exchange Rates on Importers

If you have a business in selling products that require importing raw materials from abroad, of course the exchange rate will determine the profit you will get.

However, in a condition where the rupiah weakens against foreign currencies, which are generally in the form of dollars, it will make your company spend more money than usual.

If there are conditions like this, then your company will suffer a loss if it does not increase the selling price of the product.

2. The Effect of Exchange Rates on Exporters

Changes in exchange rates are more often beneficial for business people conducting export activities.

The dollar exchange rate, which often strengthens, causes the selling price of products to be exported abroad to be sold more and more at high prices because consumers pay in dollars. Of course this is very profitable.

3. The Effect of Exchange Rates on Accounts Receivable

If the rupiah exchange rate continues to weaken against foreign currencies, this will harm entrepreneurs who have foreign debt. Because the debt value will also be higher.

So, it is better for young business people to avoid debt debt with foreign countries.

4. The Effect of Exchange Rates on Owners of Dollars

Today there are many of our people who are raising dollars. His goal is to get a higher exchange rate than when he bought dollars. This tactic is actually legitimate and can be applied as a company deposit.

Also Read:

Definition of Money Market

Definition of Foreign Exchange Rates

Definition of Consumption

This is the discussion on the meaning of currency exchange rates and the types, factors that affect exchange rates and also their impact on business.