In this increasingly globalising world, it is not unusual to make payments across national borders. Whether you are an entrepreneur doing business with international partners, or a private individual looking to buy or sell real estate outside the Eurozone, you have almost certainly encountered exchange rates and international payments. In this blog post, we take a deep dive into the world of exchange rates and international payments. We discuss what exchange rates are, how they are determined, and give you tips to make international payments as cost-effectively as possible.
Exchange rates: what are they and why are they important?
Exchange rates are the value of one currency expressed in another currency. They play a crucial role in international trade and financial markets. The exchange rate between two currencies is influenced by supply and demand on the currency market and can fluctuate every second.
How are exchange rates determined?
There are various factors that influence exchange rates, including:
- Inflation: Countries with low inflation usually have a stronger currency relative to countries with higher inflation.
- Interest rates: Interest rates affect the attractiveness of a currency for investors. A higher interest rate can lead to a stronger currency. How high or low a country's interest rate is, is often largely determined by that country's central bank.
- Political and financial stability: A stable political climate can cause the value of a currency to rise, while political unrest or instability can lead to a decline in the currency's value.
- Economic growth: Strong economic growth can increase demand for a country's currency, leading to a rise in the exchange rate.
Types of exchange rates: fixed versus floating exchange rates
Exchange rates can be divided into fixed and floating exchange rates. Under a fixed exchange rate, a country pegs its currency to another currency or a basket of currencies. This provides stability in the exchange rate and makes international trade and investments easier. A floating exchange rate is determined by supply and demand on the currency market and can fluctuate daily.
Most Western countries have floating exchange rates. Think of the euro, US dollar, Canadian dollar or the British pound. Countries where the local currency is linked to another currency include Saudi Arabia and the United Arab Emirates. Additionally, there are many countries where the currency is strictly controlled by the central bank and/or the government of that country. Think of China and many other Asian countries.
International payments: how can you pay cost-effectively in foreign currency?
When transferring money abroad or paying in foreign currency, you encounter exchange rates and any additional costs. Here are some tips for making international payments as cost-effectively as possible:
- Compare exchange rates: Exchange rates can vary between different providers. Compare the exchange rates of different banks and money transfer services, such as ValutaPartners, to find the most favourable rate.
- Watch out for hidden costs: some providers advertise low costs but incorporate extra charges in the exchange rate. Read the terms and conditions and tariffs carefully before making an international payment. Pay particular attention to how transparent the provider is. Ask whether, in addition to the exchange rate you receive, they also show the exchange rate at which the provider trades. The difference is the exchange rate margin.
- Use online money transfer services: online money transfer services, such as ValutaPartners, often have lower transaction costs and offer better exchange rates than traditional banks.
- Plan your payments: Try to plan international payments when the exchange rate is favourable. You can set up exchange rate alerts on various websites and apps to stay informed of rate movements.
- Consider currency hedging: If you regularly make international payments or transfer large amounts, it may be worthwhile to consider currency hedging. This helps to limit the risk of exchange rate fluctuations.
Conclusion
Exchange rates play a crucial role in the world of international payments. They are influenced by various factors, such as inflation, interest rates, political stability and economic growth. When making international payments, it is important to keep an eye on exchange rates and any additional costs. By comparing exchange rates, watching out for hidden costs, using online money transfer services and planning your payments, you can make international payments more cost-effectively.
FAQ
What is today's daily rate?
The daily rate for an exchange rate is usually a fixing by a bank. The bank then determines what the exchange rate is at that moment. A bank does this once or twice a day. Based on the fixing, currency exchanges are carried out for payments in foreign currency via internet banking. This is the old method and is no longer fit for purpose! Everyone, businesses and private individuals, can now always get direct access to the currency market and exchange at a real-time exchange rate. This is possible, for example, on the ValutaPartners platform.
How do you calculate the exchange rate?
Exchange rates that are freely tradable, such as the US dollar or British pound, are determined by supply and demand. The value often changes every second.
When exchanging currency, one currency is always sold and another purchased, for example euros (EUR) against US dollars (USD). The exchange rate for EUR/USD, for example 1.0930, means: how many US dollars do you get for 1 euro? If you exchange EUR 10,000 to US dollars, you receive USD 10,930 in return. You multiply by the exchange rate.
The exchange rate for EUR/GBP is, for example, 0.8825. If you exchange EUR 10,000, you receive GBP 8,825. You multiply by the exchange rate. But what if you now want to exchange GBP 10,000 to euros? Then you divide GBP 10,000 by the exchange rate! You then receive EUR 11,331 in return.
