Understand the fundamentals of currency exchange and make better decisions on your next international transfer
February 2, 2022 — 3 min read
Whether you're moving abroad, buying a foreign property, or traveling to another country, currency exchange can have a big impact on your wallet. Understanding the foreign exchange market, currency rates, and foreign exchange fees can help you take advantage of the best rates when transferring money abroad.
When you exchange your money online, at the bank, or at a currency booth, you are participating in the foreign exchange market.
The market, also known as the forex or FX market, determines the relative values of currencies. Every day, an estimated $3.5 - $5 trillion US dollars are transacted on the forex market, making it the largest financial market in the world. The market operates all across the globe, and you can exchange foreign currencies 24/7.
From another country and curious to know how much $3.5 - $5 trillion US dollars would be in your currency? Use our currency converter to find out.
Currencies are quotes and traded in pairs. Each currency pair has a base currency and a counter, or quoted, currency. The most traded currencies include: USD, EUR, JPY, GBP, ADU, CHF, and CAD. Let's break down currency pairs even further.
You might see pairs such as EUR/USD. In this case, EUR is the base currency and USD is the quoted currency. If EUR/USD = 1.13, then this means 1 euro is equal to 1.13 US dollars.
Suppose you travel to Europe with US dollars. A foreign exchange provider would sell you euros at the sell price, the rate at which a foreign exchange provider will sell currency to you. When you return from your trip, another provider would buy back your leftover euros at the buy price, the rate at which a foreign exchange provider will buy currency from you.
Remember: The sell rate is always higher than the buy rate.
The rates shown on Xe.com are mid-market rates that reflect global values. They are derived from the mid-point between the "buy" and "sell" rates from the global currency markets, so they're the fairest rates you'll see. To ensure you're getting the best rates, you can sign up for free Rate Alerts to get notified when your desired currency hits your desired rate.
When you send physical belongings internationally, there are delivery fees. The same concept applies to international money transfer. Every business needs to generate a profit - with no exception to FX providers. Here are three ways in which foreign exchange providers make money.
Just like retail stores buy products in bulk, to sell at a profit, FX providers buy currencies at wholesale prices and sell them at retail prices. The exchange rates they quote almost always include a mark-up.
If a rate is advertised at mid-market (with no mark-up), then a commission is likely charged. Currency providers may charge a flat fee, commission fee, handling fee, or minimum transaction charge.
Transferring funds by wire may be faster but typically involves a fee. Some FX providers offer cheap or even free money transfer methods like EFT or ACH when available.
How does Xe make money? Typically, our customers will be charged a small transfer fee and margin. If you want to see for yourself just how small our fees are, get a quote.
Now you have the fundamental knowledge for currency exchange. If you found this article helpful, share it with others to help them gain knowledge about their international money transfers.