All Share (J203) = 89 062
Rand / Dollar = 18.40
Rand / Pound = 23.22
Rand / Euro = 19.23
Gold (usd/oz) = 2 928.91
Platinum (usd/oz) = 989.30
Brent (usd/barrel) = 75.90
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Exchange Rate Explained for Dummies

Exhange Rate

What is the exchange rate?

An exchange rate is the rate at which the currency of one country will be exchanged for the currency of another country. Put differently, an exchange rate indicates how many units of a foreign currency can be purchased with one ZAR (South African rand).

For example, as of 28 August 2025, 1 euro was equal to R20.11, or, with one ZAR you could buy 0,050 euros.  Regarding the USD/ZAR exchange rate, 1 U.S. dollar was equal to R16.99, and one South African rand could be exchanged for 0.059 U.S. dollars.

 

Types of exchange rates

Basically, there are two types of exchange rates – fixed exchange rates and floating exchange rates.

Fixed exchange rate

A fixed exchange rate, also called a pegged exchange rate, is an exchange rate that is pegged by a country’s monetary authority (e.g. central bank) to some commonly used currency or commodity, such as gold.

If a country’s currency is pegged to that of another country, the exchange rate between those two countries remain unchanged.

A currency that uses a fixed exchange rate is called a fixed currency.

Nowadays, most fixed exchange rates are tied to the U.S.A. dollar.

Floating exchange rate

A floating exchange rate, also known as a fluctuating or flexible exchange rate, is a type of exchange rate system in which the value of a country’s currency is determined by the foreign exchange market (forex).

Floating exchange rates are determined by the law of supply and demand.

A currency that has a floating exchange rate is referred to as a floating currency.

More information about the two types of exchange rates is available in the article, ‘Floating Exchange Rate – Explained for Dummies’ on the website of SA Shares.

 

What affects the exchange rate?

Fixed exchange rate

As mentioned, some countries peg their currencies to another country’s currency. This implies that their currencies rarely fluctuate. In such a case the exchange rate only changes when the government decides so.

Usually, these rates are pegged to the US dollar. In a situation like this, a country’s central bank holds enough U.S. dollars in its foreign currency reserves (also called foreign exchange reserves) to keep its exchange rate fixed. In this way, a country’s government controls how much its currency is worth.

The way it is done is by selling its U.S. dollars for the local currency when the local currency declines. The result is that the supply of the local currency is reduced in the market, increasing the value of the currency. Simultaneously, the supply of U.S. dollars is boosted, decreasing its value. When the demand for the local currency rises, the central bank implements the opposite.

Floating exchange rate

A floating exchange rate changes constantly in relation to other foreign currencies, fluctuating almost on a moment-by-moment basis.

Normally, a government using a flexible exchange rate, does not actively step in to control the exchange rate. Its policies can influence the rate on the long term, but for the majority of countries, the government can only influence, but not regulate, exchange rates.

Fluctuations in the exchange rate can be caused by a wide range of factors. The following are some of the major factors:

  • International situations, such as Brexit and the trade war between the U.S.A. and China.
  • Balance of payments: When a country suffers a trade deficit, it implies that its foreign exchange expenditures exceed its foreign exchange revenue. This means that its demand for foreign exchange exceeds its supply of foreign exchange, resulting in a rise of its foreign exchange rate, and a declining local currency.
  • Interest rates: When a country’s internal interest rate is higher than other foreign interest rates, it will boost capital inflow. This will increase the demand for the local currency, enabling the currency to appreciate in value while the foreign exchange rate depreciates.
  • Inflation: The currency of a country with high inflation will depreciate in relation to those with lower inflation rates and vice versa.
  • Fiscal and monetary policy: An expansionary fiscal and monetary policy will devalue a country’s currency. Contrarily, a more disciplined fiscal and monetary policy will stabilise the local currency, increasing its value.
  • Economic strength and health: In the long run, a strong economy, as reflected in the country’s GDP, strongly enhances the momentum of a country’s currency.

 

Impact of exchange rates

Exchange rates play a major role in the global economy as well as in the economy of a country. For example, a strong domestic currency with a favourable exchange rate is good for imports due to cheaper foreign goods. Conversely, a weaker domestic currency boosts exports and causes more expensive imports.

Thus, the price you pay in a shop for a foreign item depends on the exchange rate of your local currency in relation to the currency of a foreign country. Likewise, if you want to visit a foreign country. If your local currency is strong in relation to that country’s currency, you will be able to buy more foreign currency. Unfortunately, the opposite is also true.

 

How exchange rates work

As already mentioned, an exchange rate indicates how many units of a foreign currency can be bought with one unit of a local currency.

To effectuate the process as mentioned above, one currency is quoted in relation to another currency, which is called a currency pair or forex pair.

For example, a South African rand (ZAR) – euro (EUR) quote will look like this:  EUR/ZAR20.1120. The first part (the euro in this example) of the pair is called the base currency, and the second (the South African rand in this instance) is referred to as the quote currency, also called the counter currency.

Analysing the quote above, it means that one euro is worth R20.11. Put differently, for one ZAR you will receive €0.05, or, one unit of the ZAR buys you 0.05 units of the euro. In the same way, if you exchange R1 000 for euros, you will receive €49.73. (R1 000/R20.11).

Regardless of which currency is the base currency, the base currency always equals 1. Taking the EUR/ZAR quote again as an example, it takes R20.11 to equal one unit of the base currency, the euro.

1.3/5 - (3 votes)

Written by:

Louis Schoeman

Edited by:

Skerdian Meta

Fact checked by:

Arslan Butt

Updated:

August 28, 2020

Written by:

Louis Schoeman

Featured SA Shares Writer and Forex Analyst.

I am an expert in brokerage safety, adept at spotting scam brokers in mere seconds. My guidance, rooted in my firsthand experience with brokers and an in-depth understanding of the regulatory framework, has safeguarded hundreds of users from fraudulent brokerage activities.

Edited by:

Skerdian Meta

Leading Analyst

Skerdian Meta FXL’s Heading Analyst is a professional Forex trader and market analyst and has been actively engaged in market analysis for the past 10 years. Before becoming our leading analyst, Skerdian served as a trader and market analyst at Saxo Bank’s local branch, Aksioner, the forex division and traded small investor’s funds for two years.

Fact checked by:

Arslan Butt

Commodities & Indices Analyst

Arslan Butt, a financial expert with an MBA in Behavioral Finance, leads commodities and indices analysis. His experience as a senior analyst and market knowledge (including day trading) fuel his insightful work on cryptocurrency and forex markets, published in respected outlets like ForexCrunch.

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