An exchange rate is the price of one currency in terms of another; currencies are bought and sold for trade, investment and speculation.
A foreign exchange rate is the price of one currency in terms of another. For example, S$1 = US$0.75 means one Singapore dollar buys 75 US cents.
Currencies are bought and sold in the foreign exchange market. People and firms need foreign currency for trade in goods and services: a Singapore firm importing American machines must pay in US dollars.
Other reasons include investment in capital goods abroad, such as building a factory in another country. Firms pay profit, interest and dividends to foreign owners. Migrant workers send remittances home to their families.
Speculators buy a currency hoping its value will rise, so they can sell later for a profit. Governments and central banks also buy and sell currencies to influence the exchange rate.
- Exchange rate
- Price of one currency in terms of another.
- Reasons to trade currencies
- Trade, investment, profit/interest/dividends, remittances, speculation, government intervention.
Worked example: Who needs which currency?
Decide who sells S$ and who buys S$ in each case.
- A Singapore importer buying Japanese cameras: sells S$ to buy yen.
- An American tourist visiting Singapore: buys S$ with US dollars.
- A foreign worker in Singapore sending money home: sells S$ for their home currency.
- A foreign firm building a factory in Singapore: buys S$.
Watch out for this
An exchange rate only matters to people who travel abroad.
Exchange rates affect the price of all imports and exports, so they affect firms, workers and consumers who never travel.
Check your understanding
A Singapore company buys oil priced in US dollars. What must it do?
- Sell Singapore dollars to buy US dollars
- Buy Singapore dollars with US dollars
- Nothing; exchange rates do not affect imports