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What is an Exchange Rate and What Does That Mean?

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Picture of British Pounds

British Money - Worth Way More Than Yours

© Kathleen Crislip
Question: What is an Exchange Rate and What Does That Mean?
Answer: Defined -- A foreign exchange rate is the relative value between two currencies. In particular, the exchange rate is the quantity of one currency required to buy or sell one unit of the other currency.* Jump straight to today's exchange rate or keep reading to understand what the exchange rate is and what that means to you.

In travel, the exchange rate is defined by how much money, or the amount of a foreign currency, that you can buy with one US dollar. The exchange rate defines how many pesos, euros, or baht you can get for one US dollar (or what the equivalent of one dollar will buy in another country).

Why Travelers Need to Know What the Exchange Rate Is

Before you travel or while you're traveling, you need to know what the exchange rate is so you will know how much your US money is worth in another country. If a buck's not worth a buck abroad, you can budget accordingly (the current exchange rate varies all the time, from "good" to "bad" [for you]... why the variation? Ask experts on war, politics, and finance).

Sometimes, it's easier to think about foreign currency in terms of US dollars. You know how much a soda costs in the US. Pretend you're buying one in France: is a soda in the Paris airport worth two euros? To know what you're paying for the soda in France, it helps to know how many US dollars two euros represents.

Let's say the euro exchange rate is 0.825835. That means one US dollar buys, or can be exchanged for, or is "worth" 0.825835 euros.

In order to find out how much two euros is in US dollars, divide 1 (one, as in one dollar) by 0.825835 to calculate how many US dollars one euro is worth in France: $1.21.

    1.00 United States dollars = 0.825835 euros
    1 euro = 1.21090 USD

By using the current exchange rate, you see that $1 equals a little over .80 euros. Two US dollars equals about 1.65 euros; two euros equals about $2.40 in US money. You're short. You need forty US cents to buy the soda, which costs $2.40 in US dollars in the Paris airport. (Thus proving that airport drinks are always spendy, and you've "lost" about 20 cents per US dollar in the transaction because of the exchange rate, which favors the euro in this example [bad for your US dollar].

What to Know About Exchanging Money

Don't rely on street kiosks in another country to give you an accurate or completely fair exchange rate. If you know what the rate is, having checked it online or at a bank, go ahead and change your money at a street kiosk, provided you can whittle the vendor down to a figure close to the current rate. It will never be as good as the deal from your debit card (often the best deal) or the number posted online because the street kiosk owner has an advantage -- he's strategically located and open early and late -- think of the reasons you pay higher prices in a convenience store to understand why a street rate may be higher than that from a bank.

How to Find the Current Exchange Rate

Use an online currency calculator or go to a bank to find the current exchange rate; again, don't rely on street kiosks or storefront money joints to give you the best deal unless you already know what it is (having found it online or at a bank). Those moneychangers are great in a pinch, though.

Read more about money and travel: How to Hide Money When Traveling | Why You Should Travel With a Debit Card | How to Get Help From Uncle Sam if You Go Broke Abroad | All About Money and Travel

*Exchange rate definition courtesy About Day Trading

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