Foreign Currency Exchange Rates and How to Interpret Them

If you’re a frequent global traveler, or you’ve served in any sort of international investment capacity, you probably have at least a vague familiarity with the currency exchange market. A currency exchange rate is generally defined as the implied cost associated with exchanging one national fiat currency for another. 

The price calculation of an exchange incorporates two factors: a domestic currency and a foreign currency, either of which can be quoted directly or indirectly. There are fixed exchange rates, such as in Saudi Arabia, where the rate never changes and is pegged to the US dollar, and flexible exchange rates, which are more prevalent, as in the Canadian dollar and Euro. 

Flexible currency exchange rates rest in a constant state of flux. Understanding the type of exchange is particularly important to both travelers and investors because it aids them in estimating their overseas budgets and foreign asset values.

How, then, does the currency exchange market work? The market is, above all, a decentralized one. There is no singular body administering the currency exchange system, recording every trade. Instead, the currency exchange trade functions on what’s called an “interbank market” in which each bank constitutes a “market maker,” recording its own transactions which are considered proprietary data. 

These banks are typically made up of the largest international banks who trade on behalf of themselves and their clients on the regular basis. The only real aspect of governance to the exchange market is the international banking credit rating approval system, an indicator by which one bank judges the financial health of another bank.

With the currency exchange market explained, how does the average consumer or investor interpret the foreign exchange market to find the best transaction rates? The good news is it’s fairly simple to find an exchange rate quote. Most of us, to start with, will simply consult a currency calculator from Western Union. While that’s usually the easy part, what’s perhaps more challenging is making sound calculations based on those quotes for those who aren’t regularly practicing them.

You can find exchange rates from a variety of sources from commercial banks to the plethora of websites that deal in money transfers and exchange. The most basic conversions are often discoverable at airports and retail banks. Professional investors and currency traders, on the other hand, utilize their trading platform of choice for the most accurate live-time data. The quotes received are given in pairs, and they usually fluctuate based on several key economic factors.

You should be aware that if you’re simply traveling through an airport, the exchangers you’ll find there will charge you a wider spread than that which you’ll find at a bank. They’re not necessarily charging a commission on the exchange. But what they are doing is exaggerating the spread. 

The difference is usually negligible, however, unless you plan on exchanging a larger sum of money, as investors often do. In that case, it makes sense to shop around to guarantee that you’re receiving the most accurate quote.

At the end of the day, there are a variety of free resources to aid you in calculating an exchange rate. If you aim to exchange a substantial sum of money, however, it makes good sense to explore the market for the best available rate and consider locking that rate in as far in advance as possible.