Refers to the rate at which one currency exchanges for another that is the amount of one currency that is exchanged for a unit of another currency in a given exchange rate regime.
In a fixed exchange rate regime, the exchange rate is determined by the government; in a floating exchange rate regime, it’s the market forces of demand and supply that determine exchange rates.
When the government increases the exchange rate and thus reducing the relative value of its currency, the process is known as devaluation. Similarly, where the exchange rate increases as determined by the free interaction of the market forces such that the relative value of the currency falls, the process is referred to as depreciation.
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