Nowadays, companies can easily do business with others across the world, which means international payments are constantly being processed. However, before you begin your transaction, it’s a good idea to study the current foreign exchange rates (FX rates).
So, what are FX rates, how are they determined, and what should you look out for? In this blog, we’re giving you the lowdown on everything you need to know to understand foreign exchange rates.
Keep reading to discover more!
What are FX Rates?
FX rates are essentially the rate at which you will receive when selling one currency in exchange for another. In other words, how much money you will gain when switching between currencies.
For example, the United States Dollar (USD) has long been worth more than the GBP. As of May 10th 2022, just one GBP was equal to 1.23 USD. If you exchange the pound for the dollar, you’ll benefit from the higher exchange rate when sending international payments. On the flip-side, you’ll lose a significant amount of money exchanging the USD for GBP.
How are FX Rates Determined?
There are a few ways in which a country determines its FX rate:
Pegged – The currency exchange rates are fixed to another currency. Therefore, the FX rate only changes when they do.
Floating – The FX rates fluctuate frequently based on several different factors.
What Factors Affect the FX Rate?
Unfortunately, foreign exchange rates are constantly fluctuating and, as a result, you’re not guaranteed to receive a good exchange rate. Sometimes, you may purchase less money than the currency you sold and vice versa. This is because of several factors affecting the rate. We’re going to explore the top three below.
Rise in Inflation
A rise in inflation can negatively affect a country’s exchange rate. This is because higher inflation directly affects the value of goods. In short, a country’s goods become significantly more expensive because of inflation.
When compared to other countries with lower inflation and cheaper goods, it means they’re less competitive in the market. Unfortunately, their currency then decreases in value as a result, meaning you’re less likely to receive a good exchange rate.
Changing Interest Rates
Interest rates rise and fall because of inflation within the country and are essentially the government’s way of controlling their financial state. For buyers of foreign currency, this can have its benefits.
For example, if the USD interest rates rise significantly, it’s a great time to purchase currency or consider sending money to the country. This is because you’re getting more money in exchange. Generally, the higher the interest, the more likely people are to invest in the currency.
When a country’s goods become more attractive to potential buyers – more so than those of other countries – they’ll increase their exchange rate. Undoubtedly, this is because they’re confident that people from all over the world are interested in the goods they’re selling. And if they really want them, they’ll pay the necessary price.
How to Get the Best FX Rate
To get the best value for money, the FX rate of the currency you’re buying should be equal to or more than the one you’re selling. It’s for this reason that you should steer clear of sending money if the exchange rate is particularly low. This way, you’ll not lose money.
But what else should you do when looking for the best exchange rate? Let’s take a look.
Prepare in Advance
Need to make an international payment today? It’s always best to plan ahead when exchanging money for a different currency to avoid a large transfer fee. This is a fixed amount you must pay if you want your money to arrive on time. Think about it – they know you’re desperate to send your money right now, so they’ll whack up the rates.
Also, when you need to make an international payment, you should study the market way before the payment is due. This way, you can ensure you’re getting the best possible rate, as paying on the day could mean suffering the consequence of a weak FX rate.
Pay in the Local Currency
Needless to say, paying your own currency to another country creates more hassle and more work – not for you, but the bank receiving your money. Therefore, they often slap an additional charge on top of your transaction to account for the trouble.
When making international payments, you should always pay in the local currency to avoid unnecessary charges. Plus, this often means your payment goes through quicker, making for a smoother, stress-free transaction.
Should You Get a Foreign Currency Account?
here’s a simple way to take advantage of the FX. And luckily, it doesn’t involve the tiresome process of studying the exchange market or figuring out how to pay in the local currency. Investing in a Foreign Currency Account, also known as a Multi-Currency Account, will change the way you deposit or withdraw your money worldwide.
Those currently available offer several winning features, such as:
- Low conversion fees
- Low overseas charges
- The best exchange rate
- Unrivalled reliability
- One account for all currencies
International Payments with DT&T: the Easy Way to Navigate FX Rates
Making an international payment? Allow us to make it simple and effortless. Our Multi-Currency Accounts enable you to send money all over the world securely and safely. With one account, you can create multiple wallets, whereby you can maintain account balances in 35 currencies. Whether sending money, converting money, or tracking a transfer, we make it easy.
What’s in it for you?
- Instant conversions at the real rate
- Instant worldwide payments
- Low, upfront fees
- 9x cheaper than banks
- 180+ countries
- Selected 24/7 delivery
Ultimately, DT&T are the ones you can trust for competitive FX rates and reduced costs when sending international payments. Visit the DT&T website for more information about our Multi-Currency Accounts.