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About foreign exchange
Foreign exchange refers to the act of changing one nation’s currency into another nation's currency. Today, foreign exchange, otherwise known as Forex or FX, can refer to a few different aspects of dealing with international currencies. It can refer to trading currencies, where investors will buy and sell different currencies trying to make a profit largely in the same way as a stock trader would, and it can also apply to simple exchanges of currencies for personal or business use. Foreign exchange can be particularly important if you live or have family overseas, invest in a foreign country, or have clients or suppliers located overseas.
How does the foreign exchange market work?
Currencies are traded on a regular basis for a variety of reasons, including companies investing in foreign companies or services, tourists exchanging their regular currency for the currency of the country they’re travelling to and more.The currency of any given country will have a value determined by a large number of factors concerned with supply and demand, including inflation, interest rates, the overall balance of trading between two countries, a nation’s debt and more.
There are many ways to convert funds from one currency to another. Each will appeal to different types of people. These include:
- Banks. Almost every bank will have a selection of currencies to allow you to convert funds, although it should be noted that more exotic currencies are usually not available on short notice. Banks traditionally charge high conversion fees and have less favourable exchange rates.
- International money transfer companies. There are more and more companies cropping up in Australia offering the full range of foreign exchange services with large varieties of currencies available. These companies also offer money transfer services so you can send the funds wherever in the globe they need to go. These companies utilise many different methods to achieve competitive exchange rates and low fees, including peer-to-peer trading.
- Foreign exchange kiosks and post offices. Usually found within airports, kiosks run by companies such as Travelex or banks offer foreign exchange services. Always be sure to compare the rates and fees you’ll be charged before converting these. Many Auspost post offices will allow you to convert funds into different currencies too.
- Credit and debit cards. Australian credit and debit cards will automatically convert Australian dollars into foreign currencies when you’re overseas. Unless these are specifically designed for international travel you’ll usually have to pay foreign transaction fees and ATM withdrawal fees. Travel cards are an offshoot of these which allow you to lock in different currencies at specific rates, and require you to load funds onto them, often waiving many foreign transaction fees.
How do I compare foreign exchange services?
- Fees. Most banks and exchange companies will charge a fee for converting currencies. These can vary wildly depending on who you go with. Some banks and companies will charge a percentage rate of say 1% of the total sale amount when buying, and others will charge a flat fee, which can be as much as $10 or even more.
- Rates. In addition to fees, most companies and banks will add a margin to the exchange rate they offer you. Some foreign exchange providers will add a large margin to rates, while more competitive providers will minimise this margin. Exercise your due diligence before going with one provider and you’ll be sure to get more value out of your exchange.
- Processing times. The importance of this will depend on why you want to convert funds from one currency to another and how much you’re converting. For those making large conversions and sending funds overseas, processing times will matter. Companies can provide priority services for an extra fee, so be sure to add this to your comparison.
- Processing options. You might want to conduct regular transactions if you have to make overseas mortgage payments for example, so be sure to add this to your comparison of foreign exchange providers.
- Extras. Other providers might also offer one-on-one services to business clients, as well as the ability to negotiate over the rate. You might also be able to take advantage of foreign exchange market analysis with your foreign exchange provider.
Keep in mind that some providers might offer competitive rates but high fees, while others might offer low fees but unfavourable foreign currency rates. What service you decide to go with should depend not only on convenience but also on the rates and fees they offer. Compare at least three providers, ideally both banks and other companies, before deciding on a service.
What are the pros and cons of foreign exchange?
- Convenient way to exchange one currency for another
- Some companies can organise regular money transfers for you so you can pay overseas bills or mortgages easily
- Competitive rates and fees are available through specialised money transfer companies
- You can trade currencies to make profits
- Currencies can fluctuate each day, so trading is risky
- Exchanging currencies can be expensive depending on the provider
- The market can be complicated to grasp
Frequently asked questions
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What is a spot rate?
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