There is nothing more frustrating than making a withdrawal from your foreign currency account or paying for goods abroad — and finding out your bank account balance has dropped by much more than expected due to the exchange rate. One of the primary reasons a rate might change is due to demand for that particular currency.
Exchange rates regularly fluctuate a bit, but at times they can have sudden, drastic changes. Betting on when those changes will happen is the cornerstone of the FX (Foreign Exchange) trading market. In some cases, you might get a happy surprise if you have cash in a currency other than dollars, and come to exchange them, only to find out their value has increased! Still, it’s usually the opposite – protection against depreciation in currency values – that most travelers and businesses are concerned with. Changing exchange rates are more complex than simple supply and demand, and there can be many factors that might cause the change to happen.
Why Has the Exchange Rate Dropped?
If the dollar exchange rate decreases, it means that you’ll get less for your money. For example:
- An exchange rate of 1.29 US Dollars against Australian Dollars means that for every $1 USD you exchange, you’ll get $1.29 AUD.
- If that drops to 1.18, you will get 0.11 cents less per dollar you exchange.
That drop in the exchange rate could have been caused by:
- A decrease in the demand for foreign exchange transactions in dollars.
- Interest rate increases, driving up the cost of borrowing.
- Economic or political uncertainty, decreasing foreign investment.
- Significant rises in inflation rates causing the currency to depreciate.
International money transfer providers keep a close eye on all of these factors, as well as trends and trajectories in order to predict what currency exchange rates will look like in the coming weeks and months.
Can Currency Exchange Rates Increase?
Just as your rates can drop, they can also grow. If you’re wondering what causes exchange rates to change, so you can potentially benefit from an appreciation in the value of your foreign currencies, it’s essential to know when it’s the right time to sell.
In many cases, increases in currency exchange rates relate to national policies, events, or announcements that increase foreign investment, drive up demand, and make the economy more stable. These are higher-level events, but even small political changes or trade agreements can impact investor confidence. In short, the more investors who wish to buy the currency, the more valuable it comes, and the tighter the capacity for supply in a higher demand market.
Factors such as tourism can also have a significant impact. Countries with a strong tourism sector, attracting visitors from around the world, benefit from diversification. This means that visitor-weighted exchange rates – measuring the currency market against those of the primary tourism markets – are more resilient to exchange rate fluctuations. This happens because they have a natural “hedge” given the broader number of currencies they trade with on the foreign exchange market. Nations that are popular tourist destinations, but only with one primary market, are more exposed since they just have one other currency they regularly trade against.
What Can I Do to Make Sure I Get the Best Exchange Rates?
The best way to protect your foreign exchange transactions from drops in value depends on what sort of transfers or exchanges you expect to make. There are lots of different options, each designed for a different scenario. For example:
- Frequent travelers or businesses trading overseas will usually benefit from multi-currency accounts, like the one Cashero offers, or a dedicated international money transfer service.
- Individuals needing a one-off cash exchange can rely on spot transfers or book in forward exchange contracts to secure a locked-in rate.
- More significant value transactions, such as a transfer to friends or family overseas, might be best off with a limit order, with a target rate and market monitoring from a professional foreign exchange service, or by using Cashero.
Each of these services is designed to offset the risks of an exchange rate falling and ensure you can plan with the confidence that you know what your funds are worth in your required currency.
What are the Different Types of Foreign Exchange Transfer Services?
- Spot transfers are used for single foreign currency exchanges at the rate available at the time of the transfer. They are used for everyday transfers or smaller values in currencies where the exchange rate is relatively stable.
- Limit orders set an exchange to take place at a target rate and can be canceled if they are no longer attractive or the exchange rate moves in the opposite direction.
- Forward exchange contracts can be booked as far as 12 months in advance. This means that individuals or businesses have a guaranteed exchange rate for their transfers. This is ideal for businesses who anticipate a potential major change in a forgein currency they frequently conduct business in.
- Multi-currency accounts enable you to hold your funds in a bank account in foreign currencies without transferring them back into US Dollars and vice versa. This protects the value of your account balance and prevents any risk of exchange rate fluctuations. With Cashero, you can hold USD, EUR, and GPB, all in a single account.
- Borderless accounts are increasingly popular with people who regularly use different currencies, make overseas transfers, or travel frequently. They allow you to hold your cash securely through a virtual banking system with instant conversions, at the real exchange rate, usually with very low or even zero fees on the best services.
- International money transfer services provide dedicated money transfers from and to almost any currency in the world. Given that they focus solely on foreign exchange transactions, they are almost always cheaper than any bank and provide secure transfers globally with substantially lower fees and more competitive exchange rates.
As you can see, there are multiple factors which cause exchange rates to change. These variables are frequently all happening at the same time, which only adds to the complexity. Luckily most major currencies in the world have a relatively stable exchange rate, and they only fluctuate a little bit on a day-to-day basis.
It’s more common you will notice bigger changes in the rate of exchange between two currencies over the long term, rather than on a single day. However major events – such as political turmoil, natural disasters, or poorly executed economic policies – can bring massive changes to a currencies value overnight, majorly impacting it’s exchange rate, so this is something to always keep in mind.
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As of the date of publication, the information contained on this page is deemed to be factually accurate for all terms of conditions, features, and fees. Changes made to Cashero’s terms of conditions, features, or fees after the publication of this content may not be accounted for.
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