How Do Exchange Rates Work?

Exchange rates determine how much your money is worth in a foreign currency. It is simply the price of buying that currency. Most currencies, foreign exchange traders determine the exchange rate. You should note that currencies are traded 24 hours a day, seven days a week. It is estimated that the market trades over five trillion dollars a day.

Major Currencies

dollarsPrice keeps changing for currencies most travelers are likely to use. These include British pounds, Canadian dollars, Mexican pesos, Japanese Yen, and European euros. That is because these countries are known to use flexible exchange rates. The central bank and government do not actively intervene to ensure the exchange rate is fixed. Their policies influence rates over long-term. In fact, for most countries, their governments can only influence and not regulate the exchange rates.


When traveling overseas, you ought to plan for the exchange rate values. For instance, when the dollar is quite strong, you can purchase more foreign currency and enjoy affordable trips abroad.  Exchange Rates can help you determine how much your currency is worth. On the other hand, if the dollar is weak, your trip is likely to cost more because you cannot purchase as much foreign currency as you would want. Also, since the exchange rates keep changing, you may be surprised to learn that the cost of your trip has changed. That is how exchange rates impact your personal finances.

Exchange Rates

It is a good idea to search online the dollar to foreign currency exchange rate to know the current rate. Also, you will find a chart showing whether the dollar is weakening or strengthening. If it is strengthening, you can wait for a few hours to purchase your currency. Check to determine whether the credit card you have will offer you the cheapest exchange rate. On the other hand, if the dollar is weakening, you should consider purchasing foreign currency rather than waiting to travel. Although banks charge a high exchange rate, they might be cheaper as compared to what you pay in the future. You can also use online currency exchange calculators.

Fixed Exchange Rates

Some currencies such as Saudi Arabia Riyal do not change easily. That is because the country uses fixed exchange rates that change when the government authorizes. In most cases, the rates are pegged to the dollar. These countries have adequate money in their reserves to control the value of their currencies. To ensure the exchange rate is fixed, the government holds dollars. If the local currency’s value falls, the bank sells dollars for the local currency.