What is an exchange rate and why does it matter?

An exchange rate is the value of one currency in relation to another currency. It determines how much of one currency is needed to purchase another, such as how many U.S. dollars are needed to buy one British pound. Exchange rates can fluctuate based on factors such as interest rates, inflation, and economic conditions. Exchange rates matter because they affect the cost of international trade, tourism, and investment. A stronger currency makes imports cheaper and exports more expensive, while a weaker currency can boost exports but increase the cost of imports.