What Are Currency Exchange Rates and Why Do They Change?

If you have travelled, shopped online internationally, or transferred money abroad, currency exchange rates have already impacted you. From booking flights and hotel rooms to buying gifts in another currency or sending money to loved ones overseas, the value of your Euro compared to foreign currencies plays a key role in how far your money goes.

Yet, many people do not fully understand what currency exchange rates are, why they fluctuate, or when the best time is to make an exchange. This guide will unpack the basics of foreign exchange rates, the factors that influence them, and why they matter for both individuals and businesses.

What Are Currency Exchange Rates?

A currency exchange rate is the value at which one currency can be exchanged for another. For instance, if the exchange rate between the Euro (EUR €) and the US Dollar (USD $) is 1.10, it means €1 is equivalent to $1.10. Exchange rates are typically quoted in pairs, indicating how much of the quote currency is needed to purchase one unit of the base currency.

There are two primary types of exchange rate systems:

• Floating exchange rates: in this system, currency values are determined by supply and demand in the market without direct government control. Rates change frequently based on economic conditions, interest rates, and investor confidence. Most major economies like the Eurozone, US, and UK use this model.
• Fixed exchange rates: This occurs when a country ties the value of its currency to that of another currency (like the USD or EUR). The central bank actively maintains this rate by buying or selling currency as needed.

Most major currencies, including all those serviced by APS Bank, operate under a floating exchange rate system, allowing their values to fluctuate based on various economic factors.

Why Exchange Rates Matter for Individuals and Businesses

Understanding exchange rates is vital for both individuals and businesses:

• Travelers: exchange rates determine how much foreign currency you receive, affecting your purchasing power abroad.
• Investors: currency fluctuations can impact the value of international investments and returns.
• Businesses: companies engaged in international trade are affected by exchange rates, influencing the cost of imports, competitiveness of exports, and overall profitability.
• Remittances: for individuals sending money abroad, exchange rates affect how much the recipient receives, impacting financial support.

Factors Influencing Currency Exchange Rates

Currency exchange rates do not shift randomly but rather in response to a web of economic, political, and market-related factors. The value of a currency in relation to another can rise or fall based on what is happening within a country’s economy, how stable its government is, or even how attractive its interest rates are to investors. Let us explore the key drivers that affect these movements.

• Inflation rates: inflation shows how fast prices for goods and services rise. Low inflation strengthens a currency by boosting purchasing power, while high inflation weakens a currency, raising import costs and reducing export competitiveness.
• Interest rates: set by a central bank, they influence currency value. Higher interest rates offer lenders a better return on investments denominated in that currency, attracting foreign capital and causing the currency to appreciate. However, if inflation is high, the positive effect of higher interest rates may be offset.
• Political stability and economic performance: countries with stable governments and robust economic performance are more attractive to foreign investors. Political instability or economic downturns can lead to a loss of confidence in a currency, prompting investors to seek safer alternatives, and depreciating the currency’s value.
• Public debt: high levels of public debt may deter foreign investment due to the risk of default or inflationary pressures from excessive money printing. This can lead to a depreciation of the currency as investors sell off holdings in that currency.
• Current account deficits: it occurs when a country imports more goods, services, and capital than it exports. This imbalance can lead to increased borrowing from foreign sources, potentially weakening the currency due to higher demand for foreign currencies.
• Speculation: if investors believe a currency will strengthen in the future, they will buy more of it now, increasing demand and causing the currency to appreciate. Conversely, expectations of a weakening currency can lead to selling off, depreciating its value.

When Is the Best Time to Exchange Currency?

Crucially, timing your currency exchange can significantly impact the amount you receive. Here are some tips to consider:

• Monitor exchange rates: keep an eye on currency trends. Exchange rates fluctuate due to various factors, so staying informed can help you choose an optimal time.
• Avoid airport exchanges: currency exchange services at airports often offer less favourable rates. Plan ahead and exchange currency at banks or reputable exchange services.
• Use online tools: utilise online currency converters and rate alerts to track and be notified of favourable exchange rates.

Get Started with APS Bank

At APS Bank, we understand the importance of competitive and transparent currency exchange services. Whether you are traveling, conducting business, or sending money abroad, our services are designed to meet your foreign exchange needs efficiently.

• Competitive rates: benefit from our competitive exchange rates for various currencies.
• Convenient services: access our currency exchange services through our branches or online platforms, ensuring convenience and flexibility.

Stay informed, plan ahead, and leverage the services offered by APS Bank to navigate the dynamic world of foreign exchange confidently. For more information and to view our latest exchange rates, fill in the form below or visit our Exchange Rates page.

Approved and issued by APS Bank plc, APS Centre, Tower Street, B’Kara BKR 4012. APS Bank plc is regulated by the Malta Financial Services Authority as a Credit Institution under the Banking Act 1994. The Bank is a participant in the Depositor Compensation Scheme and the Investor Compensation Scheme as established under the laws of Malta. Terms and conditions apply and are available on apsbank.com.mt/terms-and-conditions.