Understanding the basics of exchange rates and foreign currency
Whether you are going abroad for a well deserved vacation or planning to live and work in another country, you’ll likely need to convert your money into another currency — this is where exchange rates come in. Keep reading to learn the basics of exchange rates and their role in getting foreign currency.
What’s an exchange rate?
An exchange rate is the value of one currency compared to another — they are often referred to as forex rates or foreign exchange rates. Whenever you want to convert a particular currency into another currency, the conversion will be done on the basis of the prevailing exchange rate.
So, if you’re traveling from the US to France, you’ll need to go to a bank or foreign exchange counter to convert your dollars into euros, the accepted currency in France. The amount of euro that you get for each dollar depends on the exchange rate between the two currencies at the time. Hence, if the exchange rate is at 0.60, then this means that you will get 0.60 euro for each dollar that you exchange.
The exchange rate differs between currencies and fluctuates over time. The foreign exchange market is extremely dynamic, meaning that rates can change practically every second.
Understanding the impact of exchange rates
Foreign exchange rates can have quite a strong impact on travelers, students and businesses that deal in foreign currencies. Here’s how:
- Tourists traveling abroad: If you’re visiting a different country and the value of your currency falls against the other currency, your entire trip becomes more expensive. This is because you’ll have to spend more of your domestic currency to buy the same amount of foreign goods.
- Impact for exporters: If you export certain products to international destinations, the exchange rate between foreign currencies can have a major impact on your revenue. For example, if you sold a good 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.
- Impact on students: If you’re a student paying tuition and course fees in a foreign currency, your total fees stand to change depending on the rise and fall of exchange rates between the currencies involved.
When traveling, you can access foreign currency in different ways; you can buy cash, opt for traveler’s checks or even use credit, debit and travel cards. Each of these methods may have different fees and exchange rates, so it’s best to determine which method offers you the best rates so you can get the most bang for your buck.