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Basics of foreign currency exchange rates
Learn how to avoid paying more than the official exchange rate.
Before you take a trip abroad or do business with another country, find out what the currency exchange rates are. The rate of exchange influences the money you can earn or how much you’ll spend abroad.
Exchange rates defined
An exchange rate is the value, or price, of one currency compared to another currency. Exchange rates are written in two ways, depending on which way you want to exchange. For example, the US dollar -to-euro relationship can be written as:
- 1 USD = 0.901241 EUR
This tells you how many euros you can buy with $1.
- 1 EUR = 1.10958 USD
This tells you how many US dollars you can buy with €1
Two types of currency pairs exist in the world: fixed and flexible.
Exchange rates that shift constantly and are determined by the maximum amount someone is willing to pay for a currency and the minimum amount someone is willing to sell it for — similar to stocks. The globally accepted exchange rates are what you see when you search a currency pair on Google or XE. These are known as the mid-market rate, short for the middle-market.
Opposite of flexible currencies, these are designed to maintain a consistent exchange rate with specific currency pairs. A country may fix or “peg” its currency to another currency it trades with. This can help increase stability between the two countries for imports and exports.
For example, the Chinese yuan is pegged to the USD, and generally stays around 1 USD = 7 CNY.
How to use an exchange rate
If you’re traveling from the US to France, you need to exchange your dollars for euros at a bank or foreign exchange counter. The amount of euros you get for each dollar depends on the exchange rate between the two currencies at the time.
If the exchange rate is roughly 0.90, for example, you’ll get 0.90 euros for each dollar you exchange. At this price, $100 will buy you about €90.
Understanding the effect of foreign currency exchange rates
Foreign exchange rates can have a strong effect on travelers, students and businesses that deal in foreign currencies.
- For tourists traveling abroad. If you’re visiting a country and your currency’s value falls against the other currency, your trip becomes more expensive. You’ll end up spending more money on hotels, travel, goods and attractions.
- For exporters. If you export products, the exchange rate between foreign currencies can affect your revenue. For example, if you sold goods in Canada for $1, and the CAD to USD exchange rate was 1.00, your sale is worth $1 USD. However, if the Canadian dollar appreciated against the US dollar to an exchange rate of 1.25, that $1 CAD sale is now worth $1.25 USD.
- For students. Students paying tuition and course fees in a foreign currency could see fees increase if exchange rates between the currencies also increase.
How to get the best exchange rate
Getting the best exchange rate depends on your situation and the currency you’re exchanging. Here’s how to get the best exchange rate in the following situations:
- International transfers: Look to money transfer companies that specialize in offering the mid-market rate while checking that the fees you are paying are worth it.
- International travel: Seek out local banks, post offices or even an ATM. Avoid exchange bureaus in tourist areas and airports.
- US exchanges: Your bank may be the best place to get the lowest rate if it operates internationally.
Read more on how to get the best exchange rate in our guide that explains each category in greater detail.
Send money abroad after comparing exchange rates
Before sending your US dollars abroad, compare your options and make sure you’re getting the best deal for your transfer. Use our table to compare the rates of many money transfer providers by entering the amount you want to send, selecting the destination currency and hitting Calculate.
If you’re traveling abroad or doing business with foreign companies, the exchange rate can affect your overall finances. Get the best exchange rate by comparing multiple payment methods and using the one that suits your need, depending on your situation.
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