An FX rate, also called an exchange rate, is the price of one currency expressed in another. If the GBP/USD exchange rate is 1.30, for example, one British pound is worth 1.30 US dollars. This exchange rate definition applies whether you're converting money for travel, paying an international supplier, or moving funds across borders. FX is simply short for “foreign exchange,” so FX rate and foreign exchange rate mean the same thing.
Exchange rates make it possible to move money between currencies. A business in Japan buying goods from Germany, for example, may need to convert Japanese yen into euros to complete the transaction. The FX rate determines how much yen is needed to receive a given amount of euros.
These rates are constantly at work across the global economy, influencing everything from the cost of an overseas purchase to the value of a remittance payment. Below, we’ll look at how currency exchange rates are set, the different types of rates, what causes them to move, the costs involved in currency conversion, and their role in cross-border payments and global trade.
How Do Exchange Rates Work?
Exchange rates are determined by the foreign exchange market, where currencies are traded around the clock. For floating currencies, prices move as supply and demand change. When demand for a currency rises relative to its supply, its value generally rises. When demand falls, its value generally falls.
Currencies are quoted in pairs because a foreign exchange rate always compares the value of one currency with another. In a quote such as EUR/USD = 1.15, EUR is the base currency and USD is the quote currency. The rate means that one euro can be exchanged for 1.15 US dollars.
A wide range of participants influence the foreign exchange market:
- Banks and financial institutions: trade currencies for themselves and their clients and provide liquidity to the market.
- Businesses: buy and sell currencies to pay suppliers, receive international payments, manage cash, and hedge foreign exchange risk.
- Governments and central banks: manage monetary policy and, in some cases, intervene in currency markets or maintain a fixed exchange rate.
- Investors: trade currencies to seek returns or manage exposure to changes in exchange rates.
So, who sets currency exchange rates? It depends on the currency. For floating currencies, the market determines the rate through trading. For fixed or pegged currencies, a central bank or government sets the rate or manages it within a defined range against another currency.
Published reference rates, such as the Federal Reserve’s H.10 foreign exchange rates, work differently. They reflect market levels and can be useful for comparison and reporting, but they are benchmarks rather than prices available for every transaction.
The scale of the foreign exchange market reflects how central currency conversion is to the global economy. The Bank for International Settlements Triennial Survey put daily FX turnover at about $9.6 trillion as of April 2025, making it the world’s largest financial market by a wide margin.
Types of Exchange Rates
Most FX rates people encounter in everyday transactions are spot rates, but exchange rates can also differ based on how they are set and measured.
Spot Exchange Rate
A spot exchange rate is the current rate for exchanging one currency for another, with the transaction typically settling within two business days. When you check an exchange rate online or convert currency for an international payment, the quoted rate is generally based on the spot market.
A forward exchange rate, by contrast, is agreed on today for a currency exchange that will take place at a future date. Businesses can use forward rates to reduce uncertainty about how currency movements may affect future payments or receipts.
Fixed vs Floating Exchange Rate
One of the main distinctions between exchange rates is whether the value is determined by the market or managed by a government or central bank.
| Key Differences | Fixed Exchange Rate | Floating Exchange Rate |
|---|---|---|
| Who sets it | A central bank pegs it to another currency or a basket | The market sets it through trading |
| How it moves | Held within a narrow band or at a fixed level | Moves freely with supply and demand |
| Stability | Predictable, but requires reserves to defend the peg | Flexible, but can be volatile |
A fixed exchange rate can provide greater stability and predictability for trade, but the central bank needs sufficient reserves to maintain the peg. A floating exchange rate adjusts with market conditions, but those movements can create uncertainty for businesses operating across borders. Some countries take a hybrid approach, managing their currency within a range rather than fixing it completely or allowing it to float freely.
Nominal vs Real Exchange Rate
A nominal exchange rate is the rate at which one currency can be exchanged for another. It is the figure most people mean when they talk about an exchange rate.
A real exchange rate adjusts the nominal rate for differences in price levels between countries. Economists use the real exchange rate to compare purchasing power and the relative price of goods across economies.
Why Do Exchange Rates Change?
Exchange rates change because the supply of and demand for currencies are constantly shifting. Several factors can influence those movements, and a currency's value usually reflects more than one of them at a time.
- Interest rates: higher interest rates can make a currency more attractive to investors, increasing demand and potentially raising its value. Lower rates can have the opposite effect.
- Inflation: over time, countries with lower inflation may see their currencies strengthen relative to those with higher inflation because their purchasing power erodes more slowly.
- Trade and investment flows: international trade and capital flows create demand for different currencies. For example, foreign investment in a country can increase demand for its currency.
- Market sentiment and events: elections, geopolitical developments, economic data, and shifts in investor confidence can all cause currencies to move quickly.
Because these forces are constantly changing, exchange rates can move throughout the trading day. For a business paying an overseas supplier, that means the rate applied depends on when the conversion happens, and the longer a payment takes to clear, the longer it stays exposed to that movement. How cross-border payments work covers how settlement speed affects cash flow and working capital.
The Mid-Market Rate, Spreads, and Markups
The mid-market exchange rate is the midpoint between the buy and sell prices for a currency pair in the market. It is commonly used as a benchmark for comparing the exchange rate offered by a bank, payment provider, or currency exchange service.
The interbank exchange rate is a close cousin. It refers to the rates at which banks and large financial institutions trade currencies with one another. These wholesale market rates may differ from the rates available to businesses or consumers. Institutions that trade FX at scale typically reach these wholesale rates through prime brokerage, an arrangement in which a large bank or provider extends a client access to interbank liquidity, credit, and execution.
Much of the cost of currency conversion can be found in the gap between that benchmark and the rate a provider offers. An FX spread is the difference between the buy and sell prices a provider quotes, while an exchange rate markup is an additional margin built into the rate.
For example, if the mid-market rate for a currency pair is 1.20 but a provider offers 1.17, you receive 1.17 units of the destination currency for each unit exchanged instead of 1.20. That difference represents part of the cost of the conversion.
Comparing a quoted exchange rate with the mid-market rate can help you understand the true cost of a currency conversion. The spread or markup may add more to the total cost of sending money abroad than the stated transfer fee itself.
Exchange Rates in Payments and Trade
Exchange rates set what cross-border trade and payments actually cost, so businesses watch them as closely as prices. A stronger home currency makes imports cheaper and exports pricier. A weaker one does the opposite. For a company buying materials from abroad or selling to customers overseas, rate swings can erase margins on a deal that looked profitable when it was priced.
Payment providers handle FX as part of cross-border payments. When funds move from one currency to another, the provider converts them at an exchange rate that may include a spread or markup over the mid-market rate. Understanding how that rate is determined helps businesses compare providers and assess the true cost of the transaction.
When sending money abroad, the remittance costs that come from spreads and markups can outweigh the transfer fee itself. FX payments are one part of the broader cross-border payment process, which also involves moving, settling, and delivering funds across markets and currencies.
Ripple provides infrastructure for cross-border payments that may involve FX as funds move between currencies, but there is no standalone Ripple exchange rate. Ripple is a payments technology company, not a currency with its own market price. This is distinct from XRP, a digital asset with its own market price. Learn more about XRP on the XRP page.
