How are foreign exchange rates calculated?

The foreign exchange rate decides the worth of one currency compared to another, which can impact the amount of money that a business receives or pays while converting currencies.


Therefore, it is crucial for any global enterprise to monitor the foreign exchange rate closely to ensure that they make informed decisions when it comes to currency exchange.


 

What is the foreign exchange rate? 


The exchange rate is the rate at which one currency will be exchanged for another currency.


It’s something many are familiar with when we go on holiday and have to exchange our native currency into that of the destination country. Because some currencies are stronger than others, the money in one country can convert to a very different amount in another.


Here's an example: if you live in the UK and want to convert 100 pounds (GBP) into Euros (EUR) and the exchange rate is 1.20, then you get 120 EUR. 


The stronger the starting currency is, the more you get when converted and vice versa if it is weaker.


What's the difference between a floating and fixed exchange rate?


Floating exchange rate


This is determined through the open market, based on supply and demand as established by investors. If demand for a currency goes up, then the value of it increases, resulting in a stronger exchange rate.


If demand is low, then its rate drops. What impacts this supply and demand is a complex web of economic and political factors, including things such as changes to interest rates, unemployment, inflation, movements in gross domestic product (GDP) and so on. 


Fixed exchange rate


Some countries choose to fix their exchange rate by tying its currency to another country’s currency.



This keeps the foreign exchange rate for the native currency more certain, but has particular impacts on what a central bank can do in terms of adjusting interest rates and other issues. 


In general, most industrialised nations have a floating exchange rate, whereas smaller and developing nations may choose to fix or ‘peg’ their currency to a major currency like the US dollar.


Who sets the foreign exchange rate?


The setting of exchange rates is complex, but as explained earlier is essentially decided by supply and demand of a currency, which in turn is dictated by the behaviour of investors.


In the UK alone, foreign currency trades of more than 1 trillion GBP are made everyday. These trades set the exchange rate for the pound, which is then used by banks and foreign exchanges.


Central banks in nations can influence the foreign exchange rate, such as when interest rates are changed or by pegging the currency to another currency. The overall stability and perceived safety of a country’s economic and financial system also has an impact.


Is there a maximum amount I can exchange with 3S Money?


No, there's no limit on the value or amount of funds you can exchange.

With the help of our in-house FX team, you can access 24/7 live rates and convert in real time from 65+ currencies with instant settlement through your Client Portal.



Last updated: 02/05/24



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