For anyone who sends money between countries, trying to research and find the best exchange rate is a common challenge. But even those who transfer money abroad regularly might find it hard to understand how exchange rates really work.
To help you make the most of your next money transfer, we’ve put together some insight into exchange rates and how they work. Plus, we’ve highlighted some WorldRemit features that you can take advantage of to get the clearest rate possible.
WorldRemit Content Team
• 6 mins read •
Updated
What is an exchange rate?
Simply put, an exchange rate is the amount that one currency is worth compared to another. Both the domestic currency and foreign currency values affect the exchange rate, which changes constantly. Exchange rates are determined by a number of factors, including:
Economic activity and data
Gross domestic product
Market interest rates
Unemployment rates
Periods of political unrest or uncertainty
Countries use a fixed or floating (also known as pegged) exchange rate. A floating exchange rate is influenced by market forces, while a fixed exchange rate isn’t, and is regulated by the country’s government.
The exchange rate affects financial institutions, which trade currencies constantly. It also affects businesses because it changes supply and demand from other countries.
The exchange rate for a specific currency is often referred to using an acronym. Some you might have seen include:
GBP: Pound sterling
USD: US dollar
EUR: Euro
The only time that most of us deal with them directly is when it comes to travelling or sending money overseas. If you’re travelling, you might encounter the sell rate and the buy rate. The sell rate is the rate at which you sell your currency in exchange for the currency of the country you’re travelling to. The buy rate is the rate at which foreign currency is bought back in exchange for your currency.
Let’s use the pair of GBP/EUR as an example. If you wanted 200 GBP worth of EUR and the exchange rate was 1.19, £200 would buy €238.
Exchange rates explained
Why do we have exchange rates?
Exchange rates affect decisions made by individuals, businesses and the government, which in turn affects the economy. Exchange rates indirectly impact many different areas of your day-to-day life, from the cost of your groceries and fuel to job opportunities and interest rates on loans.
What’s better – a high or low exchange rate?
The answer to this largely depends on the country you’re sending from. If your send currency is stronger than the one you’re converting to, you’ll want a high rate. For example, if 1GBP gets you 163.05NPR one day but two days later it gets you 165.06NPR, the later higher rate is better as you would get more NPR for the same GBP price.
If you’re sending from NPR to GBP, however, that rate means you’re paying more for the same amount which isn’t as favourable.
What is FOREX?
FOREX (foreign exchange market or FX) is a global market for currency trading used by individuals, businesses, and banks. If you make a transaction that requires a currency conversion, FOREX determines how much value you get for your money.
To put it in perspective, if you bought a product in Euros and paid in US Dollars, you made a FOREX transaction.
A significant portion of the foreign exchange happens for practical purposes – for example, when you’re travelling or buying foreign goods. However, a majority of currency conversion is made to earn a profit.
How often do exchange rates change?
The FOREX market never sleeps; it’s active all day and all night. Exchange rates don’t change once a day or even once an hour. They’re constantly fluctuating in response to economic and political changes and developments as they occur around the world. This is known as exchange rate fluctuation.
What is a strong exchange rate?
A currency has a strong exchange rate when it is worth more than another country’s currency.
What is the difference between a floating and a fixed exchange rate?
Most countries around the world use a floating exchange rate. When a country uses a floating exchange rate, it is only influenced by market forces such as supply and demand and not regulated by the government.
A fixed exchange rate is a currency that isn’t influenced by supply and demand. Instead, the government controls the rate and regulates its value. Countries with fixed exchange rates, like Hong Kong, Denmark, or Saudi Arabia, usually peg the exchange rate against an internationally popular currency (US Dollar or Euro).
The country’s government then holds an abundant supply of both of these currencies. This allows them to buy and sell currency as required to keep their exchange rate at a fixed value.
What is an interbank rate?
Interbank exchange rate is used when banks exchange currencies between themselves.
This rate is usually better than the rate consumers receive. This is because currency exchange services aim to profit and often add fees or a mark-up to their exchange rate.
What factors influence the exchange rate?
Here is a brief explanation of some of the critical factors that help to determine the exchange rate.
Supply and demand
If there’s plenty of currency to go around with low or average demand, then the exchange rate is usually low. If there is less currency in circulation and the demand is high, then the exchange rate increases.
Consumer confidence
When a country’s population is confident in its economy’s stability (low unemployment or inflation), consumer spending and investment tends to be higher.
This makes the currency more attractive to investors, resulting in a higher exchange rate.
Balance of trade
A country’s balance of trade looks at the value of exports compared to the value of imports. If the balance is not equal, then this will affect the exchange rate.
If exports are higher than imports, then the country is sending more of its currency abroad. And the higher the supply of currency, the lower the demand and exchange rate.
Inflation
Inflation is the rate at which prices for goods and services are rising over time within an economy.
When a country has a consistently low inflation rate, its currency is generally more valuable, resulting in a higher exchange rate.
Interest rates
Interest is the fee that banks charge consumers to borrow money. The higher the interest rate is, the more you will be charged.
Political unrest
Political upheaval causes uncertainty, which can put FOREX traders off, lowering demand for the country’s currency and decreasing its value.
Country’s debt
If a country is in debt, then its currency is considered a riskier option by foreign investors. This can cause the country’s currency to decrease in value and the exchange rate to fall.
How do you find the best exchange rate?
A good exchange rate is as close to the interbank rate as possible.
You can find out what the current interbank rate is with a quick search on Google, but this is no guarantee of getting the rate you see. Although you can’t control the currency market, you can choose who you transfer or exchange your money with.
Finding the best money transfer provider
When looking for someone to transfer or exchange your money with, it’s important to take the following into account:
Research. Take time to read up on what different providers can offer you, how well they suit your requirements, and the safety measures they have in place for customers. Make sure you feel comfortable and secure using a service before you sign up.
Additional fees. Other fees may apply, which will impact how much you pay. Looking at other charges, such as transfer fees or reception fees, is a good way to get the best exchange rate.
Delivery. Check how long it will take for the money to be transferred. Some can make the transfer instantly, while others may take a day or two to process.
Sending money abroad
The two main options for sending money abroad are a bank wire transfer or an online money transfer. Making an international transfer with your bank or building society may sound like a simple option, but the service comes with its price.
Some banks charge fixed fees for sending money abroad, which can end up being too expensive if you’re only sending a small sum of money.
On top of this, international wire transfers can be slow, sometimes taking days to arrive with the recipient, and not all recipients want or can receive money in their bank account.
WorldRemit has lower fees than most conventional banks and money transfer services, and the majority of transfers are ready in minutes.
FAQs & Related Terms Explained
What is an exchange rate system?
An exchange rate system determines the way the exchange rate is set.
What is the nominal exchange rate?
The nominal exchange rate is the price of the domestic currency in another foreign currency. For example, if the domestic currency is GBP and is being bought in EUR, you would spend €1.19 to buy £1, which was the exchange rate at the time of writing.
What is an FX rate?
FX rate is another way of saying ‘foreign exchange rate’.
What is the spot exchange rate?
The spot exchange rate is the current price at which someone could exchange one currency for another. It is usually set by the FOREX market.
What is an exchange rate regime?
An exchange rate regime is the system a monetary authority uses to establish the exchange rate of its currency against other currencies. They normally choose between a floating or fixed exchange rate.
What is an exchange rate mechanism?
An exchange rate mechanism (ERM) is a system used to manage a country’s currency exchange rate in relation to other currencies.
What is a pegged exchange rate?
A pegged exchange rate is another name for a fixed exchange rate.
What is the mid-market exchange rate?
The mid-market exchange rate, or simply market exchange rate, is another term used for the interbank exchange rate.
What is an overvalued exchange rate?
An overvalued exchange rate is one where the country’s currency is too high when you look at their economy. It can make it difficult to export goods, as well as slowing down growth.
What is the real effective exchange rate?
The real effective exchange rate, also known as the REER, is the measure of a country’s currency against a weighted average of several other foreign currencies, divided by a price deflator or index of costs.
If a country’s REER increases, it’s a sign its exports are becoming more expensive and its imports are becoming cheaper, and is therefore losing trade competitiveness.
What is exchange rate appreciation?
Exchange rate appreciation is when the value of one currency increases relative to another. For example, if the GBP-EUR exchange rate increased from 1.18 to 1.20, it means the pound has appreciated by 2% against the euro.
What is exchange rate depreciation?
Exchange rate depreciation is when the value of one currency decreases relative to another. For example, if the GBP-EUR exchange rate decreased from 1.18 to 1.15, it means the pound has depreciated by 3% against the euro.
What is exchange rate exposure?
Exchange rate exposure is how sensitive cash flows are to exchange rate changes.
What is exchange rate risk?
Exchange rate risk is the risk that a company may be affected by changes in exchange rates.
What is exchange rate volatility?
Exchange rate volatility is what creates exchange rate risks.
What is exchange rate stability?
An exchange rate is considered stable when it does not fluctuate very much.
What is the parallel market exchange rate?
A parallel market operator will sell their goods on the black market. They set their prices by adding a premium on the exchange rate.
Send money online with WorldRemit
Online money transfer services tend to provide a quicker, more cost-effective way of transferring money overseas. With WorldRemit, you only pay a small fee and receive a fair exchange rate. All our costs are shown upfront.
We offer a variety of pay-out options, too, so you can choose whichever is most convenient for your recipient:
Cash pickup
Bank account transfer
Mobile money
Airtime top up
Receive real-time exchange rates to your phone with WorldRemit
We might be a little biased, but we think one of our best app features is live exchange rate updates. Wherever you are, get daily notifications from the app for the current exchange rate on your chosen currency.
It’s super simple to set up – no, really, it only takes five quick taps!
Simply log in to the app, then follow these quick and easy steps.
Tap on Account in the bottom right-hand corner
Go to Settings
Then Notifications
Tap on ‘Add’ next to ‘Exchange Rates’
Select which country you’d like notification for
Repeat the above steps as many times as you like for any country you’d like updates for.
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WorldRemit Content Team
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