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Currency exchange rates: what are they and how do they change

2 minutes minutes read

Every time you send money abroad you see the “exchange rate”, but have you ever thought about what it is?

What are currency exchange rates?

Exchange rates are a comparison between 2 currencies, a way of knowing how much your currency is worth in another currency. This helps you know how much money the account in the foreign country you are sending money to will receive.

There are two types of exchange rates: floating and fixed. Most countries have floating exchange rates where the rate is set by the law of supply and demand. The fixed exchange rate is set by a central bank and is set against a major currency like the US dollar or Euro.

How do they change?

Currency exchange rates are set by a large number of factors, both economical and political. The main factors that directly affect the exchange rate are the money supply, the interest rate and the financial stability of the country.

In countries where they print too much money, inflation rises and therefore, the value of the money decreases, which will cause the exchange rate to drop. The interest rate is set by a central bank and usually the higher it is, the higher the exchange rate. This is because people are going to change their currency (foreign) for the currency that is worth more (high interest rate). Finally, financial stability is linked to the risk of investing in a country. If they are constantly growing, they show financial stability and people would like to invest there, which will make the exchange rate rise.

In conclusion

Every time you send money abroad, you should take a look at the exchange rate and how it has been changing recently. You should also read the news regarding the country you are sending money to in order to have a notion of how the exchange rate will behave in the near future.

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Arturo Mendez

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