Currency Exchange Rates
Currency exchange rates is the difference of one currency compared to another. Learn how exchange rates work and currency rate exchange apps.
Exchange rates refer to the value of one currency versus another, such as how much the U.S. dollar (USD) is worth compared to a Canadian dollar (CAD). In most situations, the exchange rate is always shown as the value of your currency compared to another currency. This means if you are in the United States, the comparison will always list the value of the USD first. While this may seem like a simple concept, there is a great deal of complexity that goes into exchange rates. Exchange rates are constantly changing based on the global economy, causing the differences to fluctuate daily.
Currency exchange rates are primarily used by investors and traders. There are even investors that specialize in the foreign exchange market, known as Forex or FX. Even if you are not a Forex investor, currency exchange rates have an impact on your life. Listed below is everything you need to know about currency exchange rates.
The Importance of Currency Exchange Rates
The majority of companies, especially in the United States, rely on business from foreign markets. Many of these markets sell items that are only available outside of the United States. The cost for certain items are also less expensive through oversea markets. These businesses make their purchase using the USD. Prices for supply greatly fluctuate based on currency exchange rates.
If the value of the USD compared to other currencies increases, businesses have an easier time acquiring supplies. Because companies are not spending as much money, they can charge less for their products. The opposite is true as well. If the USD loses value, businesses are spending more to get products made, which increases the cost of their products and services.
Direct and Indirect Quotation
There are two ways to quote the currency exchange rate, directly and indirectly. With a direct quotation, the price of one currency is directly compared to another. For simplicity, the direct quote is usually how much one standard unit is worth. If you were comparing against the euro, the value would be $1 USD for 1 Euro (EUR).
An indirect quotation shows the value of currency after it is translated. If you wanted the indirect value of 10 EUR, you would receive the price in USD. Most businesses will list the indirect quotation on their website. The website looks at your location based on your IP address, then changes the price to match the currency of your country, saving you the hassle of having to search for the exchange rate.
What Causes Exchange Rate Fluctuations
There are many factors that affect currency exchange rates. Interest rates are a top consideration for currency investors. Foreign companies are more likely to invest in a country with a high domestic rate because it means their investment will yield greater profits. Interest rates are sometimes countered by inflation rates. The higher the inflation rate, the less value the currency has. Even with a high interest rate, the price may actually decrease depending on the deflation rate.
Another important factor is government debt. This refers to any money a country owes to another. Government debt has a large impact on inflation. When a government owes more money, local prices are likely to increase. This puts pressure on the currency and makes it less valuable, causing sharp declines in exchange rates. The drop is even more severe if the country is experiencing a recession. Not only does the currency value decrease, but countries experiencing a recession are considered high risk for investors. With less investments coming in, the value of the currency continues to decrease until the country manages to get out of debt.
Import and export values also change currency exchange rates. Countries that export more goods are in higher demand, so their currency increases in value. This is one of the reasons some smaller countries are able to maintain consistently high exchange rates.
Another reason currency exchange rates are constantly changing is speculation. Speculation refers to any estimate or prediction about another currency. For example, if a large corporation is shutting down in one country, the exchange rate is likely to take a hit in response. This is because that country is no longer exporting as many products. The corporation closing down also means job losses and a greater chance of inflation.
Speculation is caused by a number of factors, not always business related. Elections frequently cause currency exchange rates based on which candidate is poised to win. Certain political events can also dictate whether or not countries do business with one another, which ultimately changes the exchange rate. Not only is one currency expected to lose value, but another is likely to rise in value as other countries look for alternate trade partners.
Most Traded Currencies
With so many currencies to track, it can be overwhelming to look at exchange rates. However, many of the smaller currencies are primarily used by investors. For consumers, only the top exchange rates matter. The most common currencies in use as of writing are:
Japanese Yen (JPY)
Pound Sterling (GBP)
Australian Dollar (AUD)
Chinese Renminbi (CNY)
XE Currency Exchange is both one of the oldest and most reliable currency exchange apps available. XE automatically updates in real time and has an easy-to-use interface. In addition to looking at exchange rates, you can also perform money transfers through the app. If you download the current exchange rates, you can even access the app while you are offline. Because it was a pioneer in currency exchange services, most other exchange apps are based off of XE’s design. XE is available for both Apple and Android devices.
All Currency Converter
All is an excellent currency exchange app if you use Android or Samsung devices. The app allows you to mark your favorite currencies so you can quickly compare one currency type against a large group. It also includes a tip calculator that automatically converts total costs with indirect exchange rates.