How exchange rates work and how to get the best

Transferring money overseas and exchanging currencies has become common practice for many people in Zimbabwe. But even those who regularly transfer money abroad can find it difficult to understand how the exchange rate works.

Exchange rates have a crucial impact on the trade and economic performance of a country and often they have an indirect impact on many different areas of your daily life, from the cost of your groceries in the local market to the cost of fuel, job opportunities and even the interest rate of your bank loans.

To help you get a good deal on your next money transfer, Susan Tanaka Sitemere, Country Manager, Zimbabwe and South Africa, WorldRemit shares some insight into how the exchange rate works.

What is an exchange rate?

The exchange rate is the amount that one currency is worth in relation to another currency. For many of us, the only time we deal directly with them is when it comes to traveling or sending money overseas.

Which is better – a high or low exchange rate?

A higher exchange rate is better if you’re buying or sending currency, as it means you get more currency for your money. A lower rate is better if you are selling the currency. This way you can take advantage of the lower exchange rate.

What is forex ?

FOREX (foreign exchange or FX) is a global market for currency trading used by individuals, businesses and banks. If you make a transaction that requires currency conversion, FOREX determines the value you get for your money.

To put things into perspective, if you bought a car from a dealership in Harare and paid in US dollars, you made a FOREX transaction. However, a significant portion of foreign currency is used for practical purposes, such as when you travel or buy foreign goods. However, the majority of currency conversions are done to make a profit.

How often do exchange rates change?

The FOREX market never sleeps; it is active all day and all night. Exchange rates do not change once a day or even once an hour; they constantly fluctuate in response to Zimbabwe’s economic and political changes and developments as they occur around the world.

What is a floating exchange rate?

A floating exchange rate is where the price of a nation’s currency is set by the foreign exchange market based on supply and demand relative to other currencies. This contrasts with a fixed exchange rate, where the government determines the rate. Most countries in the world use a floating exchange rate and when a country uses this type of exchange rate, its government actions can only influence the rate, not regulate it.

What is a fixed exchange rate?

A fixed exchange rate is a currency that is not influenced by FOREX. Instead, the government controls the rate and regulates its value. Countries with fixed exchange rates like Hong Kong, Denmark or Saudi Arabia usually fix the exchange rate against an internationally popular currency (US dollar or Euro). The government of the country then holds an abundant supply of these two currencies. This allows them to buy and sell currencies as needed to maintain their exchange rate at a fixed value.

What is an interbank rate?

The interbank rate, sometimes also called the mid-market rate, is used when banks exchange currencies with each other. This rate is usually better than the rate consumers receive. This is because exchange services aim to profit and often add a fee or markup to their exchange rate.

What factors influence the exchange rate?

Here is a brief explanation of some of the critical factors that help determine the exchange rate.

  • Supply and demandIf there are many currencies and low or medium demand, the exchange rate is usually low. If there is less money in circulation and the demand is high, then the exchange rate increases.
  • consumer confidence When the population of a country is confident in the stability of its economy (low unemployment or inflation), consumer spending and investment tend to be higher. This makes the currency more attractive to investors, which results in a higher exchange rate.
  • Trade balance A country’s trade balance examines the value of exports relative to the value of imports. If the balance is not equal, it will affect the exchange rate. If exports are greater than imports, then the country sends more of its currency abroad. And the higher the supply of currencies, the lower the demand and the exchange rate.
  • Inflation Inflation is the rate at which the prices of goods and services increase over time within an economy. When a country has a consistently low rate of inflation, its currency is usually more valuable, which results in a higher exchange rate.
  • Interest rate Interest is the fee that banks charge consumers for borrowing money. The higher the interest rate, the more you will be charged.
  • Political unrest Political upheaval causes uncertainty, which can discourage FOREX traders, reduce demand for the country’s currency and decrease its value.
  • The country’s debt If a country is indebted, its currency is seen as a riskier option by foreign investors. This can lead to a drop in the value of the country’s currency and a drop in the exchange rate.

Where to get the best exchange rate?

A good exchange rate is as close to the interbank rate as possible. You can find out the current interbank rate by doing a quick search online. And while you can’t control the currency market, you can choose who you transfer or trade your money with. The two main options for sending money abroad are bank transfer or online money transfer.

Bank or building society transfers

Doing the international transfer with your bank or building society may seem like a simple option, but the service has its price.

Some banks charge a flat fee to send money overseas, which can be too expensive if you’re only sending a small amount of money. Many banks also offer low exchange rates, a tactic used to charge additional “hidden fees” on international transfers.

On top of that, wire transfers can be slow – sometimes taking days to arrive with the recipient, and not all recipients want or can receive money in their bank account.

Online money transfer services

Online money transfer services, like WorldRemit, tend to provide a faster, more cost-effective way to transfer money overseas. A good online money transfer service will only charge you a small fee and offer you a fair exchange rate, with all fees listed up front. They also often offer a variety of payment options, such as cash pickup, bank account transfer, mobile money, or airtime top-up.

Distributed by African Media Agency (AMA) on behalf of WorldRemit.

?About WorldRemit

We are a leading global payments company and, together with Sendwave, part of Zepz, a group that powers two global payment brands.

We have disrupted an industry previously dominated by legacy offline players by bringing international money transfers online, making them safer, faster and cheaper. We currently send from 50 countries to recipients in 130 countries, operate in over 5,000 money transfer corridors globally and employ over 1,200 people globally.

On the sending side, WorldRemit is 100% digital (cashless), which increases convenience and strengthens security. For those receiving cash, the company offers a wide range of options including bank deposit, cash pickup, mobile airtime recharge, and mobile money.

Backed by Accel, TCV and Leapfrog, WorldRemit is headquartered in London, UK, with regional offices around the world.

Leave a Reply