Exchange rate
The price of one currency expressed in another, determining the relative competitiveness of exports and imports between two monetary zones.
Definition and mechanisms
The exchange rate expresses the value of one currency in terms of another. It can be fixed (pegged to a reference currency by the central bank), floating (determined by supply and demand on the foreign exchange market), or under an intermediate regime (managed float, fluctuation band).
Impact on international trade
The exchange rate directly influences trade competitiveness:
- A depreciation of the domestic currency makes exports cheaper and imports more expensive
- An appreciation produces the opposite effect
- Exchange rate volatility creates currency risk that operators must manage
Currency risk management
International trade operators have several hedging instruments:
- Forward contracts: fixing the rate for a future date
- Currency options: right (not obligation) to buy/sell at a predetermined rate
- Currency swaps: exchange of financial flows in different currencies
- Hard currency invoicing: transferring the risk to the trade partner
Customs implications
The exchange rate is crucial for customs value determination (Article 146 of Implementing Regulation (EU) 2015/2447). Customs authorities publish monthly reference rates that operators must use to convert invoices in foreign currencies. An incorrect rate can lead to a customs value reassessment.