Understanding Foreign Exchange Rates

What Are Exchange Rates?

An exchange rate is the value of one country’s currency in relation to another country’s currency. It determines how much of one currency you can exchange for another.

How Exchange Rates Work

Exchange rates fluctuate constantly due to various factors:

• Supply and Demand: Like any market, currency values change based on supply and demand.
• Interest Rates: Higher interest rates offer lenders better returns, attracting foreign capital.
• Economic Indicators: GDP growth, employment rates, and manufacturing output affect currency strength.
• Political Stability: Countries with less risk attract more foreign investment.
• Market Speculation: If traders believe a currency will strengthen, they’ll buy more of it.

Types of Exchange Rates

1. Spot Exchange Rate: The current exchange rate.
2. Forward Exchange Rate: Agreed upon today for a future transaction.
3. Fixed Exchange Rate: Pegged by a country’s government.
4. Floating Exchange Rate: Determined by the foreign exchange market.

Why Exchange Rates Matter

• International Trade: Affects the cost of importing and exporting goods.
• Travel: Determines how much foreign currency you get for your money.
• Investments: Impacts returns on foreign investments.
• Inflation: Can affect a country’s inflation rate.

Common Currency Pairs

• EUR/USD: Euro vs. US Dollar
• USD/JPY: US Dollar vs. Japanese Yen
• GBP/USD: British Pound vs. US Dollar
• USD/CHF: US Dollar vs. Swiss Franc
• AUD/USD: Australian Dollar vs. US Dollar

Tips for Getting the Best Exchange Rates

• Compare total cost (rate + fees) from multiple providers
• Avoid providers with large FX markups hidden behind “no fees” claims
• Consider timing if your corridor is volatile
• Use providers that lock your quote long enough to complete payment
• Watch economic news that affects your corridor

Last updated: November 2023