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Two factors come into play when you're exchanging money: exchange rate and other fees. You can find a number of exchanges online, but these factors vary greatly between them. Read on to learn how to find the best exchange rate when you're sending money abroad.
The exchange rate is the cost of converting one currency into another. Another way to think of it is the price of one country’s currency in terms of another. For example, how much Japanese yen is worth in Australian dollars.
You can check out the graph below to see what the exchange rate is currently.
Exchange rates are determined by the foreign exchange market, where traders and banks are buying and selling currencies throughout the week. This means the exchange rate is constantly moving. We call this the mid-market rate.
However, this is generally not the rate you’ll get quoted when you want to buy or sell currency yourself. Money transfer specialists and banks may add other costs to the mid-market rate to be able to make a profit off the exchange. There’s no blanket rule across money transfer companies on how much this markup is, so it’s best to compare your options.
Wanting to exchange money at the best rate but don’t know where to start looking? These tips can help you out.
You can exchange currency at any time, but it’s near-impossible to predict how the exchange rate will move. Historical trends may give you a hint, as well as seeing if there are any events coming up that could change the stability of a country’s currency, like a political election.
From foreign currency booths at the airport to banks and even Australia Post, there are many different services that let you exchange currency. Start off by comparing your options before choosing which one to use.
To do this, check the Reserve Bank of Australia website to get an idea of current market rates. Compare the exchange rates from various providers to find the most favourable one. While most services will advertise that they don’t charge fees or commissions on currency exchange, this could mean that they offer you a less favourable exchange rate and profit on the spread between the buy/sell rates and the wholesale market rate.
Your options boil down to four main ones:
The price at which a trader or bank buys foreign currency. If you were coming back from the UK, the buy rate is the exchange rate you’d get when converting your pounds back to Australian dollars.
The price the trader or bank sells a foreign currency in exchange for the local currency. Say you’re heading to the US, you would be exchanging your money into USD using the sell rate your bank or provider is offering.
This is the rate the banks use when trading large amounts of foreign currencies between themselves. The spot rate is also known as the mid-market or inter-bank rank. If you look on Google or XE for the current rate, it will be quoting you the spot rate.
The wholesale rate only applies to very large amounts of currency. It’s used mostly by governments and financial institutions and is normally the inter-bank rate, plus a small markup fee.
This kind of exchange rate changes based on the market conditions. As supply and demand changes, the exchange rate changes with it. In Australia, we use a floating exchange rate. The US and Canada are other examples of this.
A fixed exchange rate is the opposite to a floating one. Instead of going with the market movements, it’s set and maintained by the government and uses a central bank to manage the process.
The currency is pegged against another major world currency to work out the exchange rate. For example, the currencies of Hong Kong and the United Arab Emirates are pegged to the US dollar.
Image: Shutterstock
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