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What Is an Exchange Rate?

An exchange rate is the rate at which one currency can be exchanged for another. Exchange rates and fees differ by provider. You can get money exchanged at banks, credit unions, ATMs, airport kiosks, and via some online services.

On this page, we’ll explain what exchange rates are and how they’re calculated. We’ll also answer some common questions about exchange rates.

What Does an Exchange Rate Tell You?

An exchange rate is comprised of two parts:

  1. The base currency
  2. The target exchange currency.

Example: 1 USD = 0.7 GBP*

The exchange rate is written as a ratio that represents the amount of target currency you’ll receive for one unit of the base currency. In the example above, you’ll get 0.7 British Pounds Sterling (GBP) for 1 US dollar (USD).

If you’re exchanging a specific amount of your base currency, the above example of a USD-to-GBP exchange rate looks like this:

Example: 520 USD = 365 GBP (@ 0.7)*

An exchange rate is typically presented as a formula. Often, when you look up an exchange rate, you’ll also see a reverse exchange rate which, in our example above, would be about 1.4 USD for every 1 GBP.

Exchange rates are determined by the native currency’s country.

*Figures are illustrative examples only.

How Are Exchange Rates Determined?

There are three main systems that governments use to determine foreign currency exchange rates: floating, fixed, and hybrid systems.

What Are Floating Exchange Rates?

Floating exchange rates (also called flexible or fluctuating rates) allow a currency’s value to rise or fall according to global supply and demand.

Examples of currencies with floating exchange rates include:

United StatesDollar$
European UnionEuro
United KingdomPound sterling£
SwitzerlandSwiss francFr
Examples of currencies with floating exchange rates.

What Are Fixed Exchange Rates?

Also known as pegged rates, fixed exchange rates aren’t reliant on the whims of the global market. Instead, these currencies move in sync with the price of another country’s currency. Fixed exchange rates can also be pegged to a group of other currencies, known as baskets.

Examples of fixed exchange rate currencies include:

Hong KongDollarHK$
United Arab EmiratesDirhamد.إ
Examples of currencies with floating exchange rates.

What Are Hybrid Exchange Rates?

Some countries opt for an exchange rate that’s neither fixed nor floating, called hybrid rates. Hybrid exchange rate systems typically consist of floating or fixed exchange rates combined with government intervention and control measures.

FAQs About Exchange Rates

Here are some answers to common questions about exchange rates.

How much do exchange rates fluctuate?

Even though some currencies are pegged to another, foreign exchange rates are determined by supply and demand as a whole. Rates fluctuate with geopolitical uncertainty in public awareness, while tend to narrow in range during times of perceived geopolitical stability.

Why are exchange rates from other sources different?

Online sources for exchange rates may receive data from different Application Programming Interfaces (APIs) which could be due to a variety of factors. For example, the rate data could come from different sources or it could be updated at different times.

Do you lose money exchanging currency?

When you exchange money using a service provider (for example, at a bank), you’ll pay a markup on the currency conversion rate. Since the bank is providing this service with its resources and overhead, you could consider the markup to be a fee for services rendered rather than thinking of it as losing money. The difference between the markups (or other fees) that exchange providers charge can vary. If you shop around, you can limit your “loss.”

What is a closed currency?

A closed currency, also known as a restricted currency, cannot be exchanged outside the country of origin. Some closed currencies may only allow the country’s residents to make an exchange while banning the purchase or sale of its currency by foreign residents. Countries can also place restrictions on import and export volumes or completely ban the possession of foreign currencies within their borders.

What is the difference between onshore and offshore currency exchange?

Onshore currency exchanges take place within the country’s borders while offshore currency exchanges occur in a different country than the base currency. For example, if you exchange euros for dollars while in the US, that’s considered an onshore exchange. If, on the other hand, you exchange euros for dollars while in Germany, that would be considered an offshore exchange.

Is it cheaper to use a credit card or cash abroad?

Whether it’s cheaper to use a credit card or cash abroad depends on where you’re going, at what rate you can access the local currency, and what rates your bank charges for transactions on foreign grounds. If you use a card abroad, it is usually cheaper to have it charged in the local currency with dynamic currency conversion (DCC) rates. (Ask your card issuer if you’re unsure.) Some e-banking services like Revolut offer limited no-fee withdrawals in selected foreign currencies abroad.

Which bank has the best currency exchange rate?

Local banks may offer the cheapest rates, but bigger banks like Bank of America, Chase, or HSBC may have foreign branches and services designed explicitly for international cash withdrawals and low fee transfers. In recent years, e-banking services like TransferWise have become a popular alternative to mainstream banks with cheaper fees. Smaller companies like TransferWise have fewer expenses and can afford to charge lower fees.

Which is the strongest currency in the world?

If we define “strongest” as the buying power of a single unit of currency, the strongest currency in the world is the Kuwaiti dinar. However, a currency’s strength may not solely be determined by its purchasing power. Instead, the health of a country’s national economy, cash reserves, and financial privacy may make for a “strong” currency, like the Swiss Franc.

What is the world’s weakest currency?

The world’s weakest currency by its purchasing power in units is the Iranian rial. As of March 2021, one US dollar is worth 42,000 IRR.

What is the safest currency?

The Swiss franc is relatively stable compared to the global foreign exchange market, used as a primary means of currency in a mostly self-sufficient economy, and regulated by a local financial system that prioritizes privacy. For these reasons, the Swiss franc may be considered the safest currency.

Does Walmart do currency exchanges?

Although you can’t exchange money at Walmart, you can send cash internationally in a different currency with Walmart2World either in-store, online, or via Walmart’s app. Note that Walmart charges a transfer fee of $4+ on top of its exchange rate.

How do I convert currency in Paypal?

To send money to a friend via Paypal in a different currency than your default currency, go to Send & Request. After you’ve entered your friend’s email address and phone number, click Next. At this point, you can change the currency shown underneath the Amount you want to send. Proceed with sending as usual.