Forex and bank exchange rates

1. Who determines exchange rates?

Exchange rates are determined in three ways. A fixed exchange rate is an exchange rate that a country's government and central bank tie to a globally prominent currency (think dollar and Euro). The purpose is to ensure that the currency does not fluctuate wildly and its value stays within a narrow band. For example, the Danish krone is pegged to the Euro at a rate of 746.038 kroner per 100 euro, and can fluctuate within a band of 2.25% upwards or downwards against this level.

A floating exchange rate is determined by the forex market based on demand and supply forces. It fluctuates constantly. When demand for a currency is low, its value decreases and vice-versa. This makes importing goods into the country with a weak currency more expensive, which in turn, boosts demand for local products and services. Countries may encourage a weaker currency to drive exports in global markets.

Managed floating (also known as dirty floating) is a combination of the other two regimes. The government steps in to buy and sell currencies in order to stabilise volatility and maintain a certain range.

2. Factors that affect foreign exchange rates

• Interest rates: Higher interest rates attract foreign capital. They increase the value of a country's currency versus that of countries offering a lower interest rate. Lower interest rates cause the exchange rate to fall.
   
• Inflation : A low inflation rate results in a dip in prices of goods and services, which increases consumers' purchasing power. The currency of a country that has a low and stable inflation rate gains value relative to a country with a higher inflation rate.
   
• Balance of payments : A country's balance of payments is a system recording all economic transactions with the rest of the world. When a country's exchange rate falls, exports become cheaper and imports become expensive. This leads to an account deficit and has a negative effect on balance of payment. On the flip side, an increase in the exchange rate of the currency will improve the country's balance of payment.
   
• Terms of trade : Terms of trade indicate the relationship between a country's export prices and import prices. When prices of exports increase relative to the prices of imports, the terms of trade move in a positive direction This boosts demand for the country's currency and increases its value.
• Political environment : Investors are wary about countries with a chaotic political environment and may prefer counterparts that have a stable and popular government. Therefore, political unrest is linked to a decrease in exchange rates and a weaker currency, while minimal political risk attracts foreign investment and makes the currency stronger.
   
• Cryptocurrencies are even more volatile than fiat currency issued by national banks. They're sensitive to bad press (including Elon Musk's tweets), news of crypto exchange breaches, crypto trading volumes and just about anything that might have an effect on their value or popularity.

3. Currency conversions for a foreign trip

You may wonder how the FX rate affects you when you need to buy foreign currency. Banks and currency exchange services add on a bit more to the interbank exchange rate. But rate is inconsequential when you’re buying a few hundred dollars’ worth of another currency. This is why bureax de change at airports are the default choice of travellers wanting to keep cash in handy to pay tips and make petty purchases. The other option is to exchange some money at the bank ahead of the trip and some on arrival at the airport. It’s also quick and convenient, though often not always the cheapest.

Often you will find that tourist exchange rates are better for you the longer in advance you make a purchase before your trip, so planning ahead and ordering using an internet service or branch of ChangeGroup before you depart is cheaper because they have excess currency and don’t want to have to fly that cash back.

Travellers who depend on their credit card and find that they need cash to get around conveniently either have to find an ATM and pay a small fortune in banking fees and interest even though they may get a decent rate. Also, every currency/country is different, making it important to know the fees you’ll be hit with every time you brandish your credit card towards an ATM.

If you want to make bitcoin payments regularly, think about the difficulties you may run into in a foreign country. How many shops and businesses actually accept bitcoin? What do you do if a transaction takes longer than usual to be confirmed? Miners prioritize the validation of transactions that have a higher fee. The fee does not depend on the transaction amount but the network conditions at the time and the data your transaction consumes. There have been issues previously with bitcoin transaction times and fees. There is almost no environmental impact when you buy cash at a currency exchange branch. Research shows that every bitcoin transaction you make releases over 300 kilograms of CO2. So think carefully about how you want to pay on your next foreign trip.

4. Currency conversions for Import, Export, or Asset Purchases

For large money transfers, such as making a house deposit or paying business invoices to the sum of tens of thousands of dollars and even in the millions, the best solution is to find a reputed money transfer partner that understands your needs and offers a free and fair exchange rate for the next 12 months, or an option to protect you against exchange rate fluctuations. ChangeGroup has a range of excellent solutions for this and you can look at our Global Transfers pages for more information on this.