If you’re planning for your next global adventure or international money transfer, you’ll more likely come across the words “exchange rate.” Since dealing with money can be a complicated and tricky thing, understanding how the foreign currency exchange process works is extremely important. You should be familiar with the terms and phrases associated with every exchange rate in the market.
In this article, we’ll provide a list of information on what exchange rate is all about and why every rate is different. Let’s check these out:
Foreign Exchange Rate Defined
When we say exchange rates, these are the rates that can tell you how much your country’s currency is worth in a foreign currency. In other words, an exchange rate is determined by the amount of money you can exchange for another currency. When, for example, you’re traveling or sending money abroad or outside Australia, the exchange rate is the amount of the foreign currency that you can purchase with one Australian dollar.
In order to understand the foreign currency exchange process, below are the terms and phrases that you have to know before you get started:
- Sell rate – This is basically the rate at which the foreign currency is sold in exchange for local currency. For example, if you’re going to the United States or send money there, you’ll more likely exchange your currency for US dollars using the sell rate.
- Buy rate – This rate applies to travelers who want to buy foreign currency in exchange for local money. An example of this is when you’re going to return to Australia, you have to exchange your US dollars to Australian dollars using the buy rate.
- Cross rate – This is the rate used by customers who want to exchange two different currencies but don’t involve your local currency.
- Commission – This is what the foreign exchange providers bill for the exchange of one currency to another.
If you want the lowest fees and rates available for your foreign exchange process, there are exchange rates comparison websites like The Currency Shop that can help.
Reasons Why Every Exchange Rate is Different
It’s clear that not all rates are equal. Now that you’re aware of what an exchange rate is all about, it’s time to understand the numerous factors that may affect the determination of the best exchange rates between the two countries. After all, exchange rates are defined as a comparison between the currencies of two countries. Below are the reasons why several foreign exchange providers offer different exchange rates:
- Inflation rates – Changes in market inflation can affect currency exchange rates. If your country has a lower inflation rate, it shows an increasing currency value. However, if your country experiences higher inflation, you’ll see a decrease in the value of your currency. Depending on the inflation rate of your country, the foreign currency exchange rates may vary from time to time.
- Interest rates – In addition to inflation rates, an increase in the interest rates can mean a higher exchange rate. With higher interest rates, lenders can be able to attract more foreign capital and result in the appreciation of exchange rates. However, a lower interest rate can show depreciation of the exchange rates.
- Country’s economic growth and financial stability – More than anything else, your country’s economic status can impact the exchange rates. A strong and growing economy means that more investors are willing to buy some goods and services in your country. In other words, a progressive nation can cause an increase in the value of its local currency. However, if your country is economically and financially unstable, you may see a decrease in the value of the exchange rates.
- Commission fees and other charges – Another reason why every exchange rate is different is because of the commission fees and additional charges offered by foreign exchange providers. Typically, banks have a higher rate since they add a commission or margin to the buying and selling prices. The markup now becomes their profit. So, if you’re looking for a cheaper way to exchange currency and send money abroad, you can use a money transfer comparison tool.
Moreover, if you’re considering working with a trusted money transfer service like TransferWise, watch this video to get more information:
If you’re going to travel or transfer money abroad regularly, you need to consider several factors to determine the variations in the foreign exchange rates. Thus, use this guide to avoid any issues in currency exchange rates. That way, you can be sure that your currency is exchanged for a considerable amount of rate despite the variables that may cause an unfavorable fluctuation.
About the Author:
Justin Rampono is the director of The Currency Shop, a comparison site for exchange rates.