Fixed exchange rate – where the government seeks to keep the value of a currency at a certain level compared to other currencies.Floating exchange rate – When the value of the currency is determined by market forces – supply and demand for currency.This is the exchange rate after being adjusted for the effects of inflation, it, therefore, more accurately reflects the purchasing power of a currency. For example, in the Sterling exchange rate index, the highest weighting will be given to the Euro and then the dollar. The weight given to each currency depends upon the proportion of transactions done with the country. It is expressed as an index, where the value of the index will be 100 in the base year. Exchange rate index This gives a measure of a currency against a trade-weighted basket of currencies.The Pound also dropped after the Brexit vote in June 2016 because markets were less optimistic about the long-term fortunes of the UK economy outside the EU. In mid-2008, there was a sharp depreciation in the value of the Pound because the UK was hit very hard by the credit crunch. Currencies will also undergo long-term changes depending on the state of the comparative countries.Currencies are being continuously traded on the foreign exchange markets, with the prices constantly changing as dealers adjust to changes in supply and demand.Although in real life, the dealer would make a profit. Similarly, if an American came to the UK, he would have to pay $142 to get £100. If the present exchange rate is £1=$1.42, this means that to go to America you would get $142 for £100.
The exchange rate is the rate at which one currency trades against another on the foreign exchange market.