How is the foreign exchange rate calculated?
At 3S Money, we have our own live FX desk that allows our clients to take advantage of beneficial FX rates when exchanging between accounts.
If you're a client looking to arrange a large FX transaction, send us a message and we'll see what we can do to help.
Likewise, if you'd like to become a 3S Money client to take advantage of our FX facilities as well as sending and receiving high-value global payments, check your eligibility today.
If you're a client looking to arrange a large FX transaction, send us a message and we'll see what we can do to help.
Likewise, if you'd like to become a 3S Money client to take advantage of our FX facilities as well as sending and receiving high-value global payments, check your eligibility today.
When you have to trade across borders and make international payments in different currencies, one of the major impacts on a business can be the foreign exchange rate.
What the foreign exchange rate is like has a material impact on any international business, where payments have to be converted from one currency to another.
There are two ways that determine a foreign exchange rate: a floating rate or fixed 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.
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 rates
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.
If your business is trading globally, you can find out all about which currencies 3S Money supports here.
What is the foreign exchange rate?
The exchange rate is simply the price of one currency in terms of another.
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.
For businesses, this can have a big effect when both buying and selling goods abroad. If your native currency is stronger versus the foreign currency and you’re buying goods and services abroad, you'll receive more for your money.
Conversely, if you're selling abroad this will increase the cost of your products/services, which could impact sales.
Conversely, if you're selling abroad this will increase the cost of your products/services, which could impact sales.
Businesses that operate in different markets need to have accounts that can facilitate the easy payment of different currencies. You can find out about our International Business Account and its benefits here.
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.
If you need an account to operate your business internationally and facilitate global payments, you can see our range of accounts, all with virtual IBANS, here.
First published: 21/01/2022.
Updated on 08/02/2022.
Updated on 08/02/2022.