Transferring money abroad and exchanging currency has become a common practice among many living in Zimbabwe. But even those who transfer money abroad regularly might find it hard to understand how the exchange rate works
Exchange rates are crucial in impacting the trade and economic performance of a country and often, they indirectly impact many different areas of your day-to-day life, from the cost of your groceries at the local market, to the cost of fuel, job opportunities and even the interest rate on 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 insights into how the exchange rate works.
What is an exchange rate?
The exchange rate is the amount that one currency is worth when compared to another currency. For many of us the only time we deal with them directly is when it comes to traveling or sending money overseas.
What’s 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’re selling the currency. This way, you can profit from the lower exchange rate.
What is FOREX?
FOREX (foreign exchange market or FX) is a global market for currency trading used by individuals, businesses, and banks. If you make a transaction that requires a currency conversion, FOREX determines how much value you get for your money.
To put it in perspective, if you bought a car from a dealer in Harare and paid in US Dollars, you made a FOREX transaction. However, a significant portion of the foreign exchange happens for practical purposes – for example, when you’re travelling or buying foreign goods. However, a majority of currency conversion is made to earn a profit.
How often do exchange rates change?
The FOREX market never sleeps; it is active all day and all night. Exchange rates don’t change once a day or even once an hour; they are constantly fluctuating in response to the Zimbabwean economic, political changes and developments as they occur around the world.
What is a floating exchange rate?
A floating exchange rate is where the currency price of a nation is set by the forex market based on supply and demand relative to other currencies. This is in contrast to a fixed exchange rate, where the government determines the rate. Most countries around the world use a floating exchange rate and when a country uses this kind of an 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 isn’t influenced by FOREX. Instead, the government controls the rate and regulates its value. Countries with fixed exchange rate like Hong Kong, Denmark, or Saudi Arabia, usually peg the exchange rate against an internationally popular currency (US Dollar or Euro). The country’s government then holds an abundant supply of both of these currencies. This allows them to buy and sell currency as required to keep their exchange rate at a fixed value.
What is an interbank rate?
Interbank rate, sometimes also referred to as the mid-market rate, is used when banks exchange currencies between themselves. This rate is usually better than the rate consumers receive. This is because currency exchange services aim to profit and often add fees or a mark-up to their exchange rate.
What factors influence the exchange rate?
Here is a brief explanation of some of the critical factors that help to determine the exchange rate.
- Supply and demand – If there’s plenty of currency to go around and low or average demand, then the exchange rate is usually low. If there is less currency in circulation and the demand is high, then the exchange rate increases.
- Consumer confidence – When a country’s population is confident in its economy’s stability (low unemployment or inflation), consumer spending and investment tends to be higher. This makes the currency more attractive to investors resulting in a higher exchange rate.
- Balance of trade – A country’s balance of trade looks at the value of exports compared to the value of imports. If the balance is not equal, then this will affect the exchange rate. If exports are higher than imports, then the country is sending more of its currency abroad. And the higher the supply of currency, the lower the demand and exchange rate.
- Inflation – Inflation is the rate at which prices for goods and services are rising over time within an economy. When a country has a consistently low inflation rate, its currency is generally more valuable, resulting in a higher exchange rate.
- Interest rates – Interest is the fee that banks charge consumers to borrow money. The higher the interest rate is, the more you will be charged.
- Political unrest – Political upheaval causes uncertainty, which can put FOREX traders off, lowering demand for the country’s currency and decreasing its value.
- Country’s debt – If a country is in debt, then its currency is considered a riskier option by foreign investors. This can cause the country’s currency to decrease in value and the exchange rate to fall.
Where to get the best exchange rate?
A good exchange rate is as close to the interbank rate as possible. You can find out what the current interbank rate is with a quick search online. And although you can’t control the currency market, you can choose who you transfer or exchange your money with. The two main options for sending money abroad are bank wire transfer or online money transfer.
Bank or building society wire transfers
Making the international transfer with your bank or building society may sound like a simple option, but the service comes with its price.
Some banks charge fixed fees for sending money abroad, which can end up being too expensive if you’re only sending a small sum of money. Many banks also offer low exchange rates, a tactic used to charge further ‘hidden fees’ on international transfers.
On top of this, 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 quicker, more cost-effective way of transferring money overseas. A good online money transfer service will only make you pay a small fee and will offer a fair exchange rate, with any costs shown upfront. They will also often offer a variety of pay-out options, like cash pick up, bank account transfer, mobile money or airtime top up.