Transferring money around the world is expensive and a big part of this expense is hidden in the exchange rates. In this article we’re going to clue you in on some of the mechanics of the foreign money exchange system and give you the ammunition you need to make sure that you’re always able to secure the best possible foreign exchange rates.
Foreign Money Exchange: How the Banks Set Their Rates
There are lots of things that can cause a currency to go up or down against its major trading partners. But the basic principles dictating the changes in foreign exchange rates are the same as any other commodity: the laws of supply and demand. In the event of high demand for a currency it will increase, and when that demand subsides we see a commensurate decrease in the currency’s value.
Things like economic stability, local interest rates and how attractive a country’s economy is to foreign investment will all influence the demand for its currency. For example, if New Zealand were to increase interest rates, thus making the NZ dollar more attractive to investors, one could expect the value of the NZD to rise in relation to other currencies. A decrease in those interest rates may cause the currency’s value to subside – but again this is relative to other factors in the international sphere, such as what interest rate levels are like in other major economies.
The perception of upcoming or current volatility can also have an impact on the rates that banks and remittance services will charge consumers for international money transfers. If a currency is unstable, then the financial service provider may load their rates in order to protect themselves against losses while they’re holding it. Of course, some providers abuse this by loading rates even when they are at very little risk of being affected by volatility.
The Best Exchange Rates: Why Different Banks Have Different Rates
One of the big ways that banks and remittance services profit from foreign exchange is by charging a slightly different rate to the consumer than they are paying for the currency. Just like any commodity, buying large volumes of a currency often means you get it at a cheaper rate. Banks will adjust their rates to allow for a margin on smaller transfers. Different institutions have different policies on how much they inflate the rates, which means that different service providers will often charge a different rate directly to consumers.
How Knowing This Helps You Get Better Foreign Exchange Rates
Understanding what factors come to bare on the global money exchange system enables you to make smarter choices when it comes to conducting international money transfers and to find the cheapest money transfer rates. This applies even for people who are using remittance services to conduct smaller international transfers.
This applies especially when using foreign exchange companies or remittance services. Certain remittance companies will have deals with banks in particular countries which allow them to offer more favourable exchange rates. They have these deals based on the amount of money that they exchange.
This means that shopping around between providers can mean big savings, especially by going through a remittance service which has strong relationships with financial institutions in your destination country (OrbitRemit has great deals for India and the Philippines, for example, amongst others). You can explore our live remittance rates simply by using the money transfer calculator on the right hand side of this page.