Exchange rate
The exchange rate is the rate at which one currency is exchanged for another, at fair, full present value.
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Expanded Definition
There are many levels to understanding how the exchange rate affects individuals (as tourists or investors), businesses that operate in other countries, institutional investors that trade currencies, and the financial health of a country's overarching economy.
Let's start easy. If you're an American planning a trip to Russia, you'll want to know how many rubles you're going to receive for each dollar. Use one of many currency exchange calculators found on the Internet and you might learn (for simplicity's sake) that one dollar will get you two rubles. That's usually a good thing, depending on the purchasing power of each currency. If one dollar will buy you a candy bar and one ruble will buy you a candy bar, you just doubled your candy-buying ability.
Take that to a country-wide level and it would be enticing for America (with the stronger currency) to import Russian goods. But Russia (with the weaker currency) would be less likely to buy goods from America, as the ruble has less purchasing power. However, Russia might get a bump in tourism as Americans realize they can get more for their money over there.
So a weak currency can actually help a country's economy by making its exports cheap. Also, if a company operates in a foreign country with a stronger currency, this can bolster its balance sheet when the foreign currency is converted to the home currency. In the example above, for instance, $100 earned in the U.S. would translate to 200 rubles.
Constantly changing exchange rates are indicators of how well a specific economy is doing. Everyone wants to keep tabs on whether the (insert currency here) is up or down.
What affects exchange rates? It's complicated. Currencies trade in something called foreign exchange markets, or forex. Individuals typically don't trade in this market; big financial institutions, multinational corporations, and hedge funds would be more typical participants. Just like with stocks, the supply and demand for each currency fluctuates continuously. Is a country's facing inflation or other economic trouble? That could make its currency less valued. And that could in turn hurt the economy.
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