How Does Currency Exchange Work

Currency exchange might seem complicated, but it's actually pretty straightforward once you understand the basics.

As a top-tier online marketing service that processes thousands of transfers on a daily basis, we’ve prepped this guide to help you:

• Understand how currency exchange works
• What are the different types of exchange rates
• Why do currency exchange rates change over time
• What risks related to currency exchange rates should you know about

Let us walk you through everything you need to know.

What is currency exchange exactly?

Currency exchange is simply the process of converting one country's money into another country's money.

Let's say you live in the United States and want to visit Canada. You can't buy a cup of coffee in Toronto with US dollars (well, most places won't accept them). You need Canadian dollars instead.

Here's where it gets interesting. The exchange rate tells you how much of one currency you need to get one unit of another currency. For example, if 1 US dollar equals 1.37 Canadian dollars, that's your exchange rate.

But this rate changes constantly throughout the day, sometimes even by the minute.

When you exchange money, service providers typically charge a small fee or give you a slightly worse rate than the "official" rate you see online. That's how they make money from the service.

How do currency pairs actually work?

Understanding currency pairs is like learning a new language, but don't worry, it's simpler than it looks.

Currencies are always quoted in pairs because you're essentially comparing the value of one currency against another.

Currency pairs are written in a specific format. You'll see them as either USD/EUR or USDEUR. The first currency listed is called the base currency, and the second one is the quote currency.

Think of it this way — the pair tells you how much of the quote currency you need to buy one unit of the base currency.

The most traded currency pairs

The foreign exchange market has some heavy hitters. These pairs see the most action because they represent the world's largest economies:

• EUR/USD (Euro and US Dollar)
• USD/CHF (US Dollar and Swiss Franc)
• GBP/USD (British Pound and US Dollar)
• USD/JPY (US Dollar and Japanese Yen)
• USD/CAD (US Dollar and Canadian Dollar)
• AUD/USD (Australian Dollar and US Dollar)
• USD/CNY (US Dollar and Chinese Renminbi)

Notice how the US dollar appears in most of these pairs?

That's because it's the world's primary reserve currency, meaning most international trade happens in dollars.

What are the different types of exchange rates?

Not all exchange rates work the same way. There are three main systems that countries use, and each one affects how currency values move up and down.

Fixed exchange rate

Some countries decide to peg their currency to another currency or even to gold. This means the exchange rate stays the same or moves within a very narrow range.

The government actively manages this by buying and selling currency, adjusting interest rates, and using other financial tools.

The UAE dirham is a good example. It's pegged to the US dollar at about 3.67 dirhams per dollar. This makes it predictable, but it can also create problems if the real economic conditions change while the rate stays fixed.

Floating exchange rate

Most major currencies today use floating exchange rates.

This means the market decides what the currency is worth based on supply and demand. It's like an auction where buyers and sellers determine the price through their trading activity.

Several factors influence floating rates:

• Inflation levels
• Interest rates set by central banks
• Trade balances between countries
• Economic performance and growth
• Political stability and investor confidence

Managed floating exchange rate

This system combines both approaches. The currency mostly floats freely, but the government steps in occasionally to prevent extreme movements.

Why do exchange rates change so much?

Exchange rates are constantly moving because they reflect what's happening in the real world. Multiple factors push and pull on currency values every single day.

Inflation plays a huge role. If prices are rising quickly in one country compared to another, that country's currency typically becomes less valuable.

Imagine if everything in Canada suddenly cost twice as much. People would need more Canadian dollars to buy the same things, making each dollar worth less.

Supply and demand work just like in any other market. When more people want to buy a particular currency, its price goes up.

The US dollar stays strong partly because it's used so much in international trade and as a backup currency by other countries.

Key factors that move exchange rates

Economic news and events can cause dramatic shifts in currency values:

• Natural disasters or conflicts
• Political events and elections
• Interest rate changes by central banks
• Changes in commodity prices (oil, gold)
• Trade agreements or disputes between countries
• Economic data releases (unemployment, GDP growth)

What risks should you know about?

Currency exchange isn't just about convenience. There are real risks involved, especially if you're dealing with large amounts of money or making frequent exchanges.

Exchange rate risk

This is the big one. Let's say you exchange $1,000 US dollars for euros before a European vacation.

If the dollar strengthens while you're away, those euros might be worth less when you convert them back home. You could end up with only $950 instead of your original $1,000.

Businesses face this risk constantly. A Canadian company selling products to American customers needs to worry about the CAD/USD exchange rate.

If the Canadian dollar strengthens significantly, its products become more expensive for American buyers.

Forex trading risks

Some people try to make money by trading currencies, but this comes with serious risks:

• Market manipulation by large players
• High volatility can lead to quick losses
• Unexpected political or economic events
• Leverage can amplify both gains and losses

Smart traders use tools like stop-loss orders to limit their potential losses, but currency trading is definitely not for everyone.

How has currency exchange evolved historically?

Understanding a bit of history helps explain why exchange rates behave the way they do today. Currency systems have changed dramatically over the past century.

Before 1971, most currencies were tied to gold through the Bretton Woods system. This kept exchange rates relatively stable but limited countries' ability to respond to economic problems.

When President Nixon ended the dollar's convertibility to gold, it ushered in the era of floating exchange rates we know today.

Major events that shaped modern exchange rates

Several historical events demonstrate how quickly currency values can change:

• The 1997 Asian Financial Crisis saw several Asian currencies lose 50% or more of their value in months
• Brexit caused the British pound to swing wildly as uncertainty grew about the UK's economic future
• The 2008 Financial Crisis led to a flight to "safe haven" currencies like the US dollar and Swiss franc
• The COVID-19 pandemic created massive currency volatility as countries implemented different economic responses

Where should you exchange your money?

You have several options for exchanging currency, but they're definitely not all created equal. The convenience factor often comes at a cost.

Airport currency exchange kiosks are probably the most convenient but also the most expensive.

They often charge fees of 10% or more above the actual exchange rate. Banks generally offer better rates, especially if you're already a customer.

Your best exchange options

Here's how different exchange methods stack up:

Many people now prefer online currency exchange services.

These platforms often offer better rates than traditional banks because they have lower overhead costs. Just make sure you're using a reputable, regulated service like Remitbee.

What tools can help you track exchange rates?

Staying informed about exchange rates has never been easier. Several free tools and apps can help you monitor rates and make smart decisions about when to exchange money.

Real-time rate tracking helps you spot trends and time your exchanges better. Some apps even send alerts when rates hit certain levels you're interested in.

Useful currency tools

Here are some useful currency-related tools you can use to track exchange rates:

How does currency exchange affect global trade?

Exchange rates have a massive impact on international business.

When a country's currency weakens, its exports become cheaper for foreign buyers, potentially boosting sales. But those same companies face higher costs for imported materials.

This creates what economists call "currency wars" – situations where countries might try to keep their currencies artificially weak to gain trade advantages.

While this can help exports in the short term, it often leads to retaliation from trading partners.

Real-world trade impacts

• Oil prices affect currency values since oil is traded in US dollars
• A strong euro makes German cars more expensive in other countries
• A weaker Canadian dollar makes Canadian lumber cheaper for US buyers
• Manufacturing companies often hedge currency risk to protect profit margins

What scams should you watch out for?

Unfortunately, currency exchange attracts its share of scammers. Being aware of common tricks can save you money and frustration.

Fake exchange services online are becoming more sophisticated.

They might offer rates that seem too good to be true (because they usually are). Always verify that any service you use is properly regulated and has real customer reviews.

Common currency exchange scams

• Fake currency exchange kiosks in tourist areas
• Street money changers offering "special rates"
• Fake online platforms that disappear with your money
• "Guaranteed" forex trading systems promising unrealistic returns
• Phishing emails claiming to be from legitimate exchange services

Tips for smart currency exchange

Getting the most value from your currency exchanges requires a bit of strategy and timing.

While you can't predict exchange rate movements perfectly, you can make informed decisions that save you money.

Planning ahead usually pays off.

Exchange rates for popular currency pairs are generally better than for exotic currencies. If you're traveling to a country with an uncommon currency, consider exchanging money in stages.

Money-saving exchange strategies

• Monitor rates for a few days to spot trends
• Exchange larger amounts at once to get better rates
• Compare rates from multiple sources before exchanging
• Consider using a credit card with no foreign transaction fees
• Avoid exchanging money at airports unless absolutely necessary
• Keep some cash in major currencies (USD, EUR) for emergencies
• Special considerations for frequent exchangers

If you're an expat, freelancer, or business owner who deals with multiple currencies regularly, you need a more sophisticated approach to currency exchange. Frequent small exchanges can add up to significant costs over time.

Many online services offer better rates for regular customers or larger transaction amounts. Some even provide tools to help you time your exchanges better by tracking rate trends and sending alerts.

Solutions for regular currency users

• Forex cards that let you load multiple currencies
• Business exchange services with volume discounts
• Multi-currency bank accounts that hold different currencies
• Hedging tools to protect against unfavorable rate movements
• Automated exchange services that execute trades at predetermined rates

Current exchange rate snapshot

Exchange rates change constantly, so any specific numbers quickly become outdated. However, understanding the general relationships between major currencies helps you make sense of rate movements.

As of recent data, here are some key exchange rates against the US dollar:

Remember, these rates fluctuate throughout each trading day. Always check current rates before making any exchange decisions.

Legal and regulatory aspects

Currency exchange isn't just about getting the best rate. There are important legal considerations, especially for businesses and large transactions.

Anti-money laundering (AML) regulations require exchange services to verify customer identities and report large or suspicious transactions. This is why legitimate services ask for identification and have transaction limits.

Compliance requirements

• Identity verification for most exchange services
• Licensing requirements for exchange businesses
• Record-keeping obligations for financial institutions
• Transaction reporting requirements for large amounts
• International cooperation to prevent money laundering

Why RemitBee is the smart choice for Canadians

If you're in Canada looking for better currency exchange rates without the hassle, RemitBee offers exactly what you need.

As a fully online platform, you can exchange CAD to USD and other currencies anytime, anywhere, without visiting a bank or paying airport kiosk fees. Enjoy:

• Competitive exchange rates with no hidden fees
• 100% online convenience from anywhere in Canada
• Fast, secure processing with bank-level security
• Easy bank account integration
• Transparent pricing upfront

Sign up today and see how much you can save on your next currency exchange.