What Is an Exchange Rate and How Is It Determined?
An exchange rate expresses the conversion relationship between two currencies. How it is formed and what drives its movements directly affect the actual results of currency exchange, cross-border payments, and digital-asset conversions. This guide covers exchange-rate regimes, major influencing factors, and differences between pricing in crypto markets and traditional foreign-exchange markets.
Exchange rates and currency pairs
An exchange rate is the ratio for converting one currency into another and is usually quoted as a currency pair. For example, EUR/USD at 1.08 means that 1 EUR can be exchanged for 1.08 US dollars. The first is the base currency and the second is the quote currency. Public market data often shows the mid-market rate between bid and ask prices, while an actual conversion rate usually also includes a spread.
Exchange-rate regimes and pegs
Floating exchange rates are primarily determined by supply and demand in the foreign-exchange market, with prices changing as trading occurs. Fixed exchange rates are maintained at target levels by governments or central banks through market intervention and other measures. A peg emphasizes the target relationship between a domestic currency and a reference currency or basket; it may use a fixed ratio or permit fluctuations within a range, depending on the actual regime.
Why exchange rates change
Interest-rate differentials, inflation, trade balances, and market sentiment all influence exchange rates. Higher interest rates may attract foreign capital, while sustained high inflation reduces a currency's purchasing power. A trade surplus generally increases demand for the domestic currency, whereas a trade deficit may have the opposite effect. Elections, wars, trade disputes, and central-bank announcements can also cause short-term volatility.
How crypto assets are priced
Exchange rates between cryptocurrencies and fiat currencies likewise reflect relative asset prices, but platform mechanisms differ. A CEX matches buy and sell orders through an order book, while a DEX often uses an automated market maker to price assets according to token ratios in a liquidity pool. The larger a trade is relative to the pool, the more pronounced slippage may be. Although stablecoins seek to track reference assets, they can also depeg.
Original Tutorial
https://www.binance.com/zh-CN/academy/articles/what-is-an-exchange-rate-and-how-is-it-determined