Currencies and trade: exchange rates, pegs and tariffs

Nika plans a holiday in the United States and wants to order a laptop from a US webshop. This month the euro buys more dollars than last month. Is that good news?

What an exchange rate does

An exchange rate is the price of one currency in another currency. If the euro strengthens, it buys more dollars. Then imports and holidays abroad get cheaper for Europeans, European exports get dearer for foreign buyers, and dollar-priced goods such as oil weigh less on euro-area inflation. A weaker euro does the opposite. So a stronger currency is neither good nor bad. It depends on who you are.

Many things move currencies: interest-rate differences, inflation, growth prospects, trade balances, commodity prices, political risk and flows into “safe” currencies in a crisis.

Floating, pegged and shared currencies

• A floating exchange rate is set by the market. The euro, dollar, pound and yen float.
• A currency peg fixes a currency to another. The central bank must then keep its interest rates broadly in line with the anchor country’s and spend reserves to defend the rate. The UAE dirham is pegged at 3.6725 per US dollar and the Saudi riyal at 3.75.
• China uses a managed float: a daily central rate with a trading band of ±2% against the dollar.
• ERM II is an EU arrangement that links a currency to the euro. Denmark’s krone is held at 7.46038 per euro, within ±2.25%.
• A currency union, such as the euro, has no exchange rates among its members at all.

A peg can break. From 6 September 2011, the Swiss National Bank held a floor of 1.20 francs per euro. On 15 January 2015 it dropped the floor, and the franc jumped.

Slovenia and the euro

Slovenia entered ERM II on 28 June 2004 and adopted the euro on 1 January 2007, at €1 = 239.640 tolars. Slovenia is small and open: its exports are about 79% of its GDP. The euro removed exchange-rate risk and conversion costs for trade with other euro-area countries, and made prices easy to compare.

The trade-off is that Slovenia gave up its own interest rate and exchange rate. In the 2012–13 recession it could not devalue. It adjusted through wages, prices, budgets and bank repair. The euro area now has 21 members, after Bulgaria joined on 1 January 2026.

The changeover added only about 0.2 to 0.3 percentage points to Slovenian inflation, mostly in services such as restaurants and hotels. Yet more than 80% of Slovenes had expected prices to rise. Measured and perceived inflation can differ.

Reserves, balance of payments and tariffs

Central banks hold foreign currency as savings. A reserve currency is one that many central banks hold and that is widely used in trade. In the first quarter of 2026, the dollar made up 57.1% of reserves, the euro 20.0%, the yen 5.4% and the renminbi 2.0% (IMF).

The balance of payments records a country’s dealings with the rest of the world. The current account covers trade in goods and services and income. The financial account covers investment and loans. They mirror each other: a country with a current-account deficit borrows from abroad or sells assets. In 2025 the current account was +3.6% of GDP in Slovenia, +4.4% in Germany, +4.9% in Japan, −3.8% in the United States and −3.1% in the United Kingdom (World Bank).

A tariff is a tax on imports, paid at the border by the importer. Who bears it depends on how prices adjust: the foreign producer (lower prices), importers and shops (lower margins) or customers (higher prices). Tariffs can protect an industry and raise revenue. They can also raise prices, invite retaliation and disturb supply chains.

In February 2026, the US Supreme Court ruled that the 1977 emergency-powers law the President had used (IEEPA) does not allow tariffs. The government then used other trade laws, and tariff rules keep changing.