The exchange rate of a currency is the price of that currency in terms of other
currencies. If each country has its own currency and international trade is to take
place, an exchange of currencies needs to occur. For example, when a UK resident
buys goods from France, these must be paid for in euros. The individual will probably
purchase euros from a bank in exchange for sterling in order to carry out the
transaction. There must, therefore, be an exchange rate between sterling and
euros. Likewise, there will be exchange rates between sterling and other currencies
acceptable for trade purposes. The exchange rate of a currency both influences
and is influenced by the balance of payments.