ROLE OF THE EXCHANGE RATE

The exchange rate is a price—the number of units
of one nation’s currency that must be surrendered
in order to acquire one unit of another nation’s
currency. There are scores of “exchange rates”
for the U.S. dollar. In the spot market, there is an
exchange rate for every other national currency
traded in that market, as well as for various
composite currencies or constructed monetary
units such as the International Monetary Fund’s
“SDR,” the European Monetary Union’s “ECU,”
and beginning in 1999, the “euro.” There are
also various “trade-weighted” or “effective” rates
designed to show a currency’s movements against
an average of various other currencies (see
Box 2-1). Quite apart from the spot rates, there
are additional exchange rates for other delivery
dates, in the forward markets. Accordingly,
although we talk about the dollar exchange rate in
the market, and it is useful to do so, there is no
single, or unique dollar exchange rate in the
market, just as there is no unique dollar interest
rate in the market.