07 Sep 2023
If you often switch between two or more currencies and send money online from one country to another, you know that calculating the currency exchange rates is not always easy and simple.
Currency exchange rates in an international money transfer are one of the most tricky things. If you understand them well with their types, how they are calculated, and where to get the best deal, the experience of transferring funds can be a pleasant one and can offer financial benefits.
But, if your understanding of the currency exchange rates is not what it should be, then the chances of getting fleeced by service providers, not all, of course, increase.
It is something that certainly all of the migrants, totalling about 281+ million, accounting for 3.60% of the total global population, according to a UN report, remain concerned about while transferring funds.
Check this guide out to ensure you have a holistic understanding of the currency exchange rates and are not ripped off as and when you swap different currencies.
A currency exchange rate is how you calculate the value of another currency in comparison to your currency.
For example, the difference between a British Pound Sterling (GBP) and one USD will be the currency exchange rate between the two.
I USD = 0.80 GBP. (It’s just an example; please check the accurate conversion rate with your provider when creating a transaction.)
Simply put, a currency exchange rate is the rate at which you can buy another currency.
These calculations are tricky and largely depend on several factors which determine these exchange rates.
Before taking a look at the currency exchange rates, you must remember one point about these rates, which is that they are never fixed and static. They keep fluctuating in the international market.
However, the internal economic condition of a country also determines whether the rates are fixed or flexible. That is where it has a deep bearing on your money transfer as an expatriate because a flexible exchange rate will help you get some extra financial benefits against a fixed currency exchange rate.
Let’s now take a look at some of the critical factors that determine the rates.
A country with a healthier economy will make foreigners invest in it, which serves as a boost in currency exchange rates by driving up the demand for the concerned currency.
In a politically unstable country, there is a lot of speculation about whether the incumbent government will stay in power or not and hold potential investors – local and foreign – back from investing in the economy. This hampers economic growth, pushes the currency’s value downwards, and bears a negative impact on currency exchange rates.
It is one of the reasons that the economies of most developing countries are weaker than those of developed countries.
Another determinant of the exchange rates of a currency is the level of foreign investment. If the volume of foreign investment in a country is high, it shows investors’ confidence in a country’s economic growth.
It is another critically important factor in determining exchange rates. With a rise in the level of inflation, the value of a currency drops. Or put it this way: a devalued currency’s first indication is a rise in inflation level and a substantial drop in people’s power to purchase.
These are some of the critically important factors that determine currency exchange rates, whereas other factors, such as level of debt, trade, interest rates, geopolitical factors, etc., all largely stem from the factors discussed above.
Mainly, there are two following types of currency exchange rates.
A fixed exchange rate is mostly offered by several financial institutions, including banks. These rates are kept fixed for 24 hours, at least, if not more, against the international market, where these keep fluctuating. The risk factor is involved in getting a deal in fixed currency exchange rates because the concerned institution will not entertain a rise in the rates according to the trends in the international market within a specific business day.
Here’s where a money transfer service other than banks comes into play. This type of rate is linked to the ever-fluctuating market. It allows you to initiate a transaction at a time when you think the rates are most in your favour. Albeit it may take you some time to wait for the most competitive exchange rates in a transaction, there is no risk involved in this, as is the case in fixed rates.
You can find the currency exchange rate in the following three ways.
This question concerns you the most as an expatriate. Right? Find the answer below.
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FAQs
What is an exchange rate, and why is it important in 2023?
An exchange rate is the value of one currency relative to another currency. It determines how much of one currency you can get with a certain amount of another currency. In 2023, with globalisation and increased international trade, understanding exchange rates is crucial for travellers, investors, businesses, and consumers as it affects purchasing power, investments, and the overall economic landscape.
How are exchange rates determined in the modern market?
Exchange rates are influenced by a combination of factors, including interest rates, inflation, political stability, economic performance, and market speculation. They can be either floating (determined by supply and demand on the open market) or pegged (fixed by a government or central bank to another currency or basket of currencies).
What are the common misconceptions about exchange rates?
Some common misconceptions include believing that a "strong" currency is always a sign of a healthy economy, that central banks can control exchange rates indefinitely without consequences, and that low exchange rates are always bad for tourists. In reality, the implications of exchange rates are multifaceted and can vary based on context.
How can I ensure I'm getting the best deal when exchanging money?
To get the best deal, consider the following steps:
Are digital or cryptocurrencies influencing exchange rates in 2023?
Yes, digital currencies and cryptocurrencies have become increasingly influential in the financial world by 2023. Their adoption and fluctuating values can impact traditional currency markets and exchange rates. Some people even opt to use them as a hedge against currency volatility, though they come with their own set of risks and volatilities.
