We hear about exchange rates all the time, but what are they and why are they so important? Let’s explore the answers to these questions…
What is an exchange rate?
A foreign currency exchange rate is a way to describe how the value of one country’s currency compares to the value of another currency.
The exchange rate between two currencies essentially answers the question “How much of this currency will I need to buy one of that currency?”
Understanding exchange rates
Exchange rates are usually labeled with the currency codes of the two currencies being compared. For example, GBP/USD exchange rate. The first currency listed is the one being purchased, unless otherwise specified.
The number describes the price of one currency in terms of the other currency.
For instance, if the GBP/USD exchange rate is 1.32, that means you’d need USD$132 to purchase GBP£100.
In the same scenario, the USD/GBP exchange rate is 0.76, meaning it would take GBP£76 to purchase USD$100.
Why do exchange rates change?
Most currencies have ‘floating’ exchange rates that are always fluctuating as foreign exchange traders buy and sell currencies. When a currency appreciates, its exchange rate with another currency increases and more of the foreign currency is needed to buy one unit. Using the above example, if the UK’s Pound appreciates and the GBP/USD exchange rate rises to 1.5, it would take USD$150 to buy the same GBP£100.
If a currency depreciates in value, that means its exchange rate with a foreign currency goes down and less of the foreign currency is needed to buy one unit. Read more about calculating exchange rates to see how exchange rates can be compared.
There are some currencies around the world that are managed by national governments to maintain a fixed exchange rate so that the value of their currency is ‘pegged’ to the value of an outside currency. For instance, the BSD/USD exchange rate is fixed at 1. In other words, 1 Bahamian Dollar can be exchanged for 1 U.S. Dollar.
Why exchange rates are so important
Whether you’re just traveling for a short time or moving to live in a new country, it’s important to be aware of foreign exchange rates when converting and spending money abroad. That way, you know if you’re actually willing to pay the sticker price of goods or services in terms of your home currency.
Exchange rates are also a key factor when you’re sending money internationally, as the recipient will receive the funds in a different currency. When the exchange rate is high, your recipient will receive more than they would when the exchange rate is low, even though you’re sending the same amount of cash on your end. In other words, because of the high exchange rate, the same $100 is really worth more.
Banks and other currency exchange services often quote remittance customers at poorer rates than the interbank exchange rate so they can earn a profit on your international money transfer transaction.
Revolut has no hidden fees and offers great exchange rates, making it simpler and more affordable to send money abroad. Just choose how much you want to send and where to. We’ll take care of the rest.
Where can I see currency exchange rates?
Want to learn more about exchange rates? Dive deeper into understanding the interbank exchange rate and calculating the exchange rate yourself.
Ready to send money abroad? Here’s everything you need to know about making international money transfers with Revolut.
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