Before you can buy a coffee in Paris, you need euros. If you hold dollars, you must exchange them. The rate at which you do so is the exchange rate, the price of one currency in terms of another. It fluctuates constantly, driven by trade, investment, interest rates, and speculation.

Rates matter enormously. A strong currency makes imports cheap and exports expensive. A weak one does the reverse. When the Japanese yen weakens against the dollar, Japanese cars become more affordable in the United States, helping Toyota and Honda, but Japanese tourists find American hotels pricier. There are winners and losers in every currency move.

Governments intervene sometimes. China manages its currency within a band. Others let markets set the rate and only step in during crises. Fixed exchange rates, like the gold standard of the past or the euro today, reduce uncertainty but require giving up control over monetary policy. Floating rates offer flexibility but can be volatile.

What moves exchange rates

• Interest rate differentials
• Inflation rates
• Trade balances
• Political stability
• Speculation and market sentiment