Exchange Rate

The Exchange rate – also known as foreign-exchange rate, forex rate or FX rate – is the Forex trading essential indicator. It usually quotes the price with whom the “currency pairs” are exchanged.

As an example we could use the Euro/ US dollar currency pair, usually shown with the abbreviation EUR/USD. The first term of the couple, Euro in this case, is the base currency, while the second one  -in this case the US Dollar- represents the quote currency or counter currency.

‘Direct Quotation’ is the name usually given to the Exchange rate in a certain country, using the currency of the country itself. For instance, this happens when we use ‘0,6745 EUR=1 USD’ to show the exchange EUR/USD.
The phrase ‘Indirect Quotation’ is used when it happens the opposite case. When the monetary unit of a certain country is shown through the local country currency as a result we’ll have an ‘indirect quotation’.

For example, this case happens when we express the exchange rate EUR/USD with 1EUR=1,4825 USD, while being in Italy.

We have had the exchange rate system we have today for about 35 years, in fact, this kind of floating currency market was turning into a fixed exchange rate system, in the past. In 1944, through the Bretton Woods agreement, a fixed exchange rate system was started. The values of the most important currencies were fixed to the value of the US dollar.

From 1944 to 1971 the values of the currencies were only rarely changed in agreement with the International Monetary Fund.
In the 1970ies the system changed because of the strong inflation. The Federal Reserve had no longer enough gold to pay the dollars back, and most industrialized countries switched gradually to a system of floating rates, occasionally influenced by the governments, as the one we have today.