Rate definition
Rate
In Foreign Exchange (Forex), the rate is the value of one currency against another, representing how much of one it would take to buy the other. So, for example, if the exchange rate between the euro and the British pound is 0.85, it would cost €0.85 to buy £1.
Exchange rates are expressed in currency pairs, which use an acronym for each currency, followed by the exchange rate. So, in the example given above, the rate would read EUR/GDP 0.85.
Free-floating vs fixed exchange rate
A free-floating vs fixed exchange rate refers to the system under which forces determine changes to a currency value. A free-floating rate is determined by supply and demand in the private marketplace, and a fixed or pegged exchange rate is when a government pegs the value of its currency to a stronger currency.
A country opts for a fixed exchange rate to stabilize its economy by pegging to a more robust currency. In this case, the central bank will adjust its currency ratio by buying or selling its currency against that which it is pegged.
For example, Belize pegs its currency to the US, a significant trading partner with a highly developed economy. Before 1976 the Belize dollar was tied to the British pound, but when the US overtook the UK as their main source of imports, they switched their currency to the USD.