Basics of Foreign Exchange Rates and Foreign Currency

Rates and Fees verified correct on December 9th, 2016

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.

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6 Responses to Basics of Foreign Exchange Rates and Foreign Currency

  1. Default Gravatar
    J | April 1, 2013

    My husband has received a personal cheque for $USD10,000 from a solicitor following the death of his aunt. When this first happened right before Christmas I deposited the cheque to our St George cheque account, and the exchange rate was dismal. When a second cheque arrived unexpectedly a few weeks ago, I decided to search for a better rate. The solicitors have not contacted us, but we gather from their note that there may be a further cheque following the sale of the house. I have investigated various banks’ exchange rates and after several hours googling online am little wiser, but the multi currency accounts that Citibank offers seem potentially attractive. Very grateful for your advice on how to proceed and how to minimise losses, given the strong AUD currently (which may slip in months to come).

    • Default Gravatar
      meme | March 11, 2014

      hi
      i have 100,000.00 euros from an inheritance that need to be transferred to a australian bank or fund account and would like to know how to go about setting it up so as not having to pay heavy exchange fees
      thanks in advance

    • Staff
      Marc | March 11, 2014

      Hi meme,
      thanks for the question.

      We’ve published a list of different international money transfer organisations here. I’d recommend comparing the services of each before you apply for any accounts.

      I hope this helps,
      Marc.

    • Staff
      Jacob | April 10, 2013

      Hi J. Thanks for your question. There’s not much you can do about the exchange rate. Your subject to the rate offered by various lenders, which can be found online, but you can cut down on the cost of international transaction fees. You’re right in suggesting the Citibank Plus Transaction Account. Consider opening a Citibank account in the United States, depositing the money into that account and then sending it to your local Citibank Plus Transaction Account. There is no fee for this transfer. You will still be subject to Citibank’s exchange rates. Let us know whether this has been useful. Jacob.

    • Default Gravatar
      Tim | September 11, 2013

      Hi, I have some business with people in United States. I occasionally find this post here.
      I’m wondering how can I create an Citibank account in United States?

    • Staff
      Shirley | September 11, 2013

      Hi Tim,

      Thanks for your comment.

      Please note that the products listed on finder.com.au are based in Australia – if you wish to open a Citibank account in the United States, they may not match our reviews.

      To open a Citibank account in the United States, please visit your closest Citibank branch.

      Hope this helps,
      Shirley

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