Understanding the basics of exchange rates and foreign currency
Whether you are going abroad for a well deserved vacation, or you are planning to live and work in an international destination, or you simply work for a company that has international offices – in every situation you may be required to deal with foreign currency. The Australian dollar may not be accepted in most international destinations and you will need to convert the Australian dollar into the local currency of that country in order to have spending money while travelling. This is where exchange rates come in. This article aims to explain the basics of exchange rates and how to utilise these rates to obtain foreign currency.
What is exchange rate?
Exchange rate is often referred to by other names such as Forex rate or foreign exchange rate. Basically, whenever you want to convert a particular currency into another foreign currency, the conversion will be done on the basis of the prevailing exchange rate. For example, if you are travelling from Australia to France, you will need to convert your Australian dollars into the Euro, which is the accepted foreign currency in France. Hence, you will need to approach a bank or a foreign exchange counter and sell your Australian dollars in order to buy Euros. The amount of Euros that you will get for each Australian dollar will depend on the foreign exchange rate between these 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 Australian dollar that you exchange.
The exchange rate differs from currency to currency and will also be different at different times. Since the foreign exchange market is extremely dynamic, rates of exchange can change practically every second. However, most foreign currencies do not fall or rise very drastically in a short span of time such as few minutes or hours. However, if you were to check the exchange rate between two currencies over a matter of a few days or months, then there can be considerable difference in the exchange rates at the two times.
The exchange rate of different currencies fluctuates according to the supply and demand for that particular currency. If the demand is high for a certain currency in a particular country, then the value of that currency will be higher than the local currency of that country. When demand falls, the value of the currency also goes down.
Understanding the impact of exchange rates
Foreign exchange rates can have quite a strong impact on travellers, students, as well as businesses that deal in foreign currencies. Here is a look at the impact that different types of foreign exchange exposure brings with it.
- Tourist travelling abroad: If you are planning to visit an international destination and the value of your currency falls against the other currency, then your entire trip stands to become more expensive. Since you will be paying for accommodation, eating, shopping and travelling with the foreign currency, you will have to spend more Australian dollars to buy the foreign currency as the exchange rate becomes higher. Even your flight tickets could become more costly depending on the prevailing exchange rate.
- Impact to exporters of goods: If you are an exporter in Australia and you export certain products to international destinations, then the exchange rate between foreign currencies can have a major impact on your profits and losses. For example, if you sell a product for $1 in the US and the exchange rate is at $1, you will get 1 Australian dollar for each product. However, if the exchange rate changes and the US dollar appreciates in value against the Australian dollar, then the same product sale could fetch you more money in Australian currency. Hence, if the exchange rate is at $1.05, then for every product that you sell for USD 1, you will earn Australian $1.05. Similarly, if the US dollar falls against the Australian dollar, then your earnings in Australian dollar will become lower.
- Impact on students: International students who study abroad are also affected by changes in exchange rates. If you are paying your tuition and course fees in foreign currency, then your total fees stands to become higher or lower depending on the rise and fall of exchange rates between the concerned foreign currencies.
Thus, it is very important to pay attention to the foreign exchange rates if you are planning to travel, study, or work abroad. When travelling, you can access foreign currency in different ways. You can either buy cash or you can opt for traveller’s cheques that can be exchanged for local currency when you arrive at your final destination. Credit cards, bank debit cards and travel cards can also be used to access foreign currency when travelling abroad. However, since each of these methods may have different fees associated with them, as well as be subject to different exchange rates, it is best to determine which method offers you the best exchange rate and then opt for that method so that you can get maximum value for your money.