How Exchange Rates Work
An exchange rate is simply the price of one currency in terms of another. If the EUR/USD rate is 1.10, it means 1 euro buys 1.10 US dollars. These rates fluctuate constantly based on supply and demand in the global foreign exchange market, which is the largest financial market in the world with over $6 trillion traded daily.
What Influences Exchange Rates
Several factors cause currency values to rise and fall:
- Interest rates: Higher interest rates attract foreign investment, increasing demand for a currency and pushing its value up.
- Inflation: Countries with lower inflation tend to have stronger currencies because their purchasing power is more stable.
- Economic stability: Political stability and strong economic performance make a currency more attractive to investors.
- Trade balances: Countries that export more than they import generally have stronger currencies due to higher demand from foreign buyers.
- Market speculation: Traders buying and selling currencies based on expectations can cause short-term fluctuations.
Where Exchange Rates Differ
You will notice that the rate shown on Google or our currency converter is different from what you get at a bank or airport kiosk. There are several types of rates:
- Interbank rate: The rate banks use when trading with each other. This is the purest rate and what you see on financial websites.
- Retail rate: What banks and exchange services offer to consumers. They add a margin (spread) to make a profit.
- Tourist rate: Airport kiosks and hotels typically offer the worst rates, with spreads of 5-10% or more.
Tips for Getting the Best Exchange Rates
- Compare multiple providers: Check rates from your bank, online services like Wise or Revolut, and local exchange offices.
- Avoid airport exchanges: They consistently offer the worst rates due to captive customers and high overhead.
- Use credit cards with no foreign fees: Many travel cards offer competitive exchange rates with zero transaction fees.
- Monitor rates over time: If you are planning a large transfer, track rates for a few weeks to catch a favorable movement.
- Consider online transfer services: Digital services often offer significantly better rates than traditional banks.
Using Our Currency Converter
Our currency converter uses current market data to give you accurate interbank rates. Use it as a reference to understand the true cost of a transaction before you visit an exchange service. Knowing the interbank rate helps you evaluate how much margin a provider is adding.