Exchange rates form a fundamental aspect of the global economy, affecting everything from international trade to travel plans. But what exactly are foreign exchange rates and how do they work? Here’s a quick guide.
What is an exchange rate?
An exchange rate is the value of one country’s currency in relation to another’s.
Imagine you’re planning a trip to the United Kingdom from Europe and you need to spend pounds while you’re there.
Let’s say the exchange rate at the time made 1 EUR worth 0.87 GBP. This means that for every Euro you exchange, you’ll receive 0.87 pounds in return.
If the exchange rate changes to 0.84 pounds at the time of your travels, it would mean that the EUR has dropped in value and your 1 euro would only be able to get you 0.84 GBP, therefore making your trip more expensive.
What is the Market Rate?
The Market rate (sometimes also called the ‘interbank’ or ‘mid-market rate’) is the official live currency conversion rate for a given currency pair. It is essentially the wholesale rate and the price at which banks or large financial institutions trade currencies with each other.
When talking about exchange rates, you might also hear the term Customer Rate. It can be confusing but there is a difference between the two.
How is a Market Rate different from a Customer Rate?
Generally, if you’re looking to exchange currency, you won’t be offered the Market Rate. Instead, you’ll be given a ‘retail’ or ‘Customer Rate’. Our OFX Customer Rate is an estimated rate that is based off the current Market Rate and includes our margin but excludes any fees (if applicable).
Looking to send money internationally? Compare currencies and get real-time market rates. Check today’s rates
How do exchange rates work?
Think of exchange rates like the ever-shifting ocean tides. Similar to how the ocean is constantly moving, fluctuations in rates happen frequently and could range from hourly adjustments to significant shifts over a day.
Exchange rates move too, and are influenced by numerous factors. These could include economic policies and interest rates.
Central banks and governments also play a significant role by adjusting interest rates and implementing policies that influence their currency’s value.
Check your currency’s past performance with OFX’s historical rates tool. View today’s historical rates
What to look for when comparing exchange rates?
When you trade currencies, banks and money exchange companies typically charge a margin (or mark-up) on the rate they offer.
The margin is the difference between the rate banks or companies obtain from the wholesale foreign exchange market (i.e. the Market Rate), and the rate that is quoted to you (i.e. the Customer Rate).
Note that the margin will vary from time to time, from currency to currency and may also take into consideration the amount of your transaction. It is not a separate amount that you have to pay; rather, it is built into the exchange rate.
Similarly, you will also find a mark-up in retail stores. For example, when you buy a shirt or dress, the price you pay includes a margin added by the store to cover their expenses and generate a profit.
Banks and currency exchange providers may add a margin to the market rate, to cover their operational costs and make a profit from facilitating currency conversions.
Get market rate alerts direct to your phone or inbox. OFX’s Rate Alert tool allows you to set and track the market rate you want. Set your alert
Where to find the best exchange rates
Finding the most advantageous exchange rates could significantly impact the value of your currency exchange. Here are different avenues to compare from:
- Local banks or large financial institutions
Local banks and financial institutions are well-established and equipped to handle significant currency exchanges. However, they could charge a higher margin on the market rate. You may also need to pay an international transaction fee (or foreign exchange fee) for using their service. This fee may vary depending on your country and bank.
- Currency exchange kiosks
Exchanging currency at standalone kiosks (those you see at airports or major shopping malls) is a straightforward and immediate process (often to obtain cash), with a wide range of currencies available. However, their rates are usually fixed and non-negotiable.
- Online money exchange and transfer services
Online money transfer or currency exchange platforms like OFX are convenient for their accessibility and could offer better exchange rates, especially for larger transactions.
Unlike the banks and dedicated currency kiosks, operations are online or over the phone. With internet access, you could check and lock in your rate anytime, anywhere.
“The online portal is good for smaller amounts and calling for a better rate on larger transfers is quick and easy. The rates are better than the banks and there are no exorbitant fees.”
– Peter, OFX client
Getting the best exchange rates with OFX
Our goal at OFX has always been to provide the best possible customer rate, as close to the market rate as possible, with no or lower transaction fees.
- Save more on exchange rate margins
OFX helps you save on exchange rate margins through our global network of 115 bank accounts. This helps to lessen the currency conversion process and any associated transaction fees, making the most of the value of your international money transfers.
For instance, if you’re sending funds from the UK to Europe or vice versa, we may use our local bank accounts to make the transfer, avoiding the need for your money to cross multiple international borders.
That’s how OFX can keep our margins low compared to traditional banking institutions. Some providers might also quote a good exchange rate, but supplement a narrow margin with high transaction fees.
Enjoy extra savings on your first transfer. New to OFX? Take advantage of a great introductory rate across 7 currencies (GBP, EUR, AUD, USD, NZD, CAD, SGD) on your first personal transfer. Terms and conditions apply. Calculate your rate
- OFX helps you stay on top of exchange rates
Life can get busy. To take advantage of the best exchange rates, you could tap into our monitor currency tools to know when the rates are more favourable.
Sign up for our OFX Currency Outlook news or Rate Alerts to help you stay informed about market conditions.
- Transfer at your schedule
Timing is crucial when it comes to the currency market. That’s why our OFXperts are available 24/7, so you can make transfers in 50+ currencies with ease on your schedule, not your banks.
Save more with OFX
At OFX, we believe in a fair approach to pricing. See how much you could save with our great rates.
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IMPORTANT: The contents of this blog do not constitute financial advice and are provided for general information purposes only without taking into account the investment objectives, financial situation and particular needs of any particular person. OzForex Limited (trading as OFX) and its affiliated entities make no recommendation as to the merits of any financial strategy or product referred to in the blog. OFX makes no warranty, express or implied, concerning the suitability, completeness, quality or exactness of the information and models provided in this blog
