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Exchange rates explained

A currency's value reflects a country's economic and political stability.

Exchange rates are the rate at which one country’s currency is traded for another. And they fluctuate with the market. But how rates are calculated and what affects them ultimately depends on the mid-market rate, interest rates and the overall stability of a country.

The mid-market rate

The mid-market rate is the midpoint between the buy and sell prices, or the demand and supply for a currency. This is the best rate you could possibly get, and it’s what you’d get if a company really charged you no fees and a 0% commission.

Traders on the world’s markets buy currencies at the mid-market rate and then sell them at a markup to turn a profit.

Our graph shows the fluctuations of the US dollar against the euro, set by rates buyers and sellers are offering on the foreign exchange market.

Updated: 20 Oct 2021 15:38:39 UTC

Read more on the mid-market rate

What influences foreign exchange rates?

Exchange rates are among the ways that experts determine a country’s economic performance. But underlying geopolitical and economic factors, not to mention overall demand, can influence how much a country’s currency is worth.

  • Inflation. A low inflation rate can cause a country’s currency to rise in value, because its purchasing power increases in comparison with other countries. If Country A has an inflation rate of 2% and Country B has an inflation rate of 3%, the exchange rate between the two countries will shift so that Country A’s currency becomes more valuable.
  • Interest rates. When interest rates go up, currency rates tend to follow. This is because high interest rates attract foreign investors, which in turn increases demand for native currency.
  • Public debt. When debt owned by the central government increases, a country becomes less attractive to foreign investors. This happens because large public debt welcomes inflation.
  • Terms of trade. If a country imports more than it exports, the value of its currency will depreciate. Because the country is spending more in foreign currency than it’s earning in native currency, the currency supply is greater than the demand.
  • Political stability. Investors won’t take the risk of investing in a country experiencing political turmoil and uncertainty, and the value of its currency will fall if investors feel their money is safer elsewhere. For example, after the UK voted to leave the EU, the value of the pound fell dramatically — about 20% against the US dollar.
  • Economic stability. When a country enters a recession, interest rates are often decreased to stimulate the economy. This weakens the country’s currency, which depreciates in value. A recession can also cause foreign investors to pull out, further driving down the currency’s value.
  • Speculation. Rumors about stability and trade sow the seeds of doubt about a country’s currency, even if nothing’s happened yet. To keep their money safe, investors may pull out of a country, for instance, if they suspect it faces political turmoil or rising inflation.

Quotes from banks and money specialists

Most banks and foreign exchange specialists quote an exchange rate that’s higher than the mid-market rate, sometimes called the interbank rate. Charging a margin on the mid-market rate is how these companies turn a profit on transfers.

By calculating how much foreign currency you’ll receive from a provider compared to the mid-market rate, you can learn how much if a margin you’re paying on the exchange.

Amount sent in USDAmount received in EUR
Bank of America LogoBank of America$10,000€8,289
Mid-Market RateMid-market rate$10,000€8,696
XE money transfersXE Money Transfers$10,000€8,598

Rates based on research on January 5, 2019.

Using our chart, you’ll see that you can save about €310 when transferring $10,000 with XE, rather than Bank of America.

Compare all money transfer providers

Our table lets you compare the services you can use to send money abroad. Compare services on transfer speeds and fees, then click Go to site when you're ready to send.
Name Product Filter Values Fastest Transfer Speed Fees (Pay by Bank Transfer) Learn More
24 hours

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OFX has no maximum limit transfers, with competitive exchange rates for 45+ currencies.
Dunbridge Financial
Dunbridge Financial
24 hours

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Dunbridge Financial offers competitive exchange rates and zero fees on transfers to more than 120 countries.
24 hours
SPECIAL OFFER ✓ Minimum transfer of $1,000 for Finder readers (normally £5,000)

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Exclusive: Minimum transfer of $1,000 for Finder readers (normally $5,000).
CurrencyTransfer lets you shop around for the best exchange rate on its online marketplace.
Within minutes

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XE has fast transfers with low fees and a range of foreign currency tools.
Within an hour
From $1.99

View details
New customers send USD 20 to Lebanon and use code ADD10 for a USD 10 discount. Valid till 7 November 2021. T&Cs apply.
WorldRemit sends money to 110+ countries for bank-to-bank deposits, cash pick-ups or mobile top-ups.
Wise (TransferWise)
Within an hour
From $2.26

View details
Wise uses the mid-market rate and transparent fees to help you send money in 45+ currencies.
Within an hour

View details
Exclusive: Use code GET60 to save 30 USD on each transaction over 200 USD. Valid for the first two transactions and till 30 November 2021. T&Cs apply.
Instarem offers zero transfer fees on all transfers.
Within minutes
From $0
SPECIAL OFFER ✓ Free transfers and better exchange rates available for new customers

View details
Special offers like free transfers and better exchange rates available for new customers.
Remitly has quick, affordable transfers around the world, with both express and economy options.
Western Union
Within an hour
From $0

View details
Western Union sends money online to friends and family in 200+ countries around the world.
Within an hour
From $0

View details
MoneyGram has fast cash pick-up transfers to more than 350,000 agent locations worldwide.

Compare up to 4 providers

Bottom line

Exchange rates are influenced by demand, socioeconomic and geopolitical factors and what investors think a currency’s worth. While it’s hard to predict exactly what a currency will do, keeping track of the overall economic and political health of a country can help you narrow down the best time to transfer money overseas.

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