6.4.1—Exchange rate

The exchange rate tells how much of one currency is needed to buy a unit of another. Always state the quotation convention before interpreting appreciation or depreciation.

If £1 buys more dollars than before, sterling has appreciated against the dollar under that quotation. The market price reflects demand and supply for currencies, arising from trade, investment, interest expectations and confidence.

If £1 rises from $1.25 to$1.30, sterling has appreciated against the dollar; UK imports priced in dollars become cheaper in pounds, other things equal.

“A stronger exchange rate” is meaningless without naming the currency and quote direction, and a market rate is not the same as purchasing-power parity.