How to Interpret Foreign Exchange Rate Charts

Foreign exchange charts typically look like the one produced by the Pacific Exchange Rate Service. You can always get a current, up to date exchange rate chart at the Pacific Exchange Rate Service's Today's Exchange Rates page. Let's recreate and reference the first five entries of the exchange rate chart from September 10, 2003, below for the purposes of this explanation.

Foreign Exchange Chart Example from September 10, 2003

The first two columns of the chart contain the country code, country, and country name for their national currencies. The third column has the title Units/USD and compares each of the five currencies to the U.S. Dollar. The base of comparison for these exchange rates is the U.S. Dollar. In fact, the base for comparison will normally be the currency given after the forward slash ("/").

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An Overview of Real Exchange Rates

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The base of comparison is generally dictated by whatever country you are in, so Americans use the U.S. Dollar as a base, and Canadians generally use the Canadian Dollar. Here we are given exchange rates for both.

Interpreting Foreign Exchange Charts

According to this foreign exchange chart, on September 10, 2003, 1 U.S. Dollar was worth 1.5205 Australian Dollars (see row 3, column 3) and according to the same logic, 1 U.S. Dollar was also worth 2.9149 Brazilian Real (see row 5, column 3).

The fourth column has the column USD/Units. Under this category, each currency listed in column 1 is used as the base for comparison. So the figure in row 2, column 4 reads "0.3396" USD/Unit, which should be interpreted as 1 Argentinean Peso is worth 0.3396 U.S. Dollars or less than 34 U.S. cents. Using this same logic, the Canadian Dollar is worth 73 U.S. cents as indicated by the figure "0.7321" in row 6, column 4.

Columns 5 and 6 are to be interpreted the same as columns 3 and 4, except now the base for comparison is the Canadian Dollar in column 5 and column 6 indicates how many Canadian Dollars you would get for 1 unit of each country's currency. We should not be surprised to see that 1 Canadian Dollar is worth 1 Canadian Dollar, as shown by the number "1.0000" on the bottom right corner of the chart.

Now that you have the basics of understanding foreign exchange charts, let's go a little deeper.

The Property of Exchange Rates

Exchange rates must have the following property: Y-to-X exchange rate = 1 / X-to-Y exchange rate. According to our chart, the American-to-Canadian exchange rate is 1.3659 as 1 U.S. Dollar can be exchanged for $1.3659 Canadian (so here the base for comparison is the U.S. Dollar). Our relationship implies that 1 Canadian Dollar must be worth (1 / 1.3659) U.S. Dollars. Using our calculator we find that (1 / 1.3659) = 0.7321, so the Canadian-to-American exchange rate is 0.7321, which is the same as the value in our chart in row 6, column 4. So the relationship does indeed hold.

Other Observations: Opportunities for Arbitrage

From this chart, we can also see if there are any opportunities for arbitrage. If we exchange 1 U.S. Dollar, we can get 1.3659 Canadian. From the Units/CAD column, we see that we can exchange 1 Canadian dollar for 2.1561 Argentinean Real. So we'll exchange our 1.3659 Canadian for Argentinean currency and receive 2.9450 Argentinean Real (1.3659*2.1561 = 2.9450). If we then turn around and exchange our 2.9450 Argentinean Real for U.S. Dollars at the rate of .3396, we will receive 1 U.S. Dollar in return (2.9450*0.3396 = 1). Since we started with 1 U.S. Dollar, we have not made any money from this currency cycle so there are no arbitrage profits.