Why do exchange rates change?

Exchange rates fluctuate based on: interest rate differentials between countries, inflation rates, economic performance, trade balances, political stability, and central bank interventions. Currencies of stable, high-interest-rate economies tend to appreciate.

What is the bid-ask spread in currency exchange?

The bid-ask spread is the difference between the rate at which a dealer buys currency (bid) and sells it (ask). Banks and exchange services make money on this spread. The wider the spread, the higher the effective cost to exchange. Mid-market rates (used here) are the midpoint and the fairest reference rate.

What is the difference between spot rate and forward rate?

Spot rate is today's exchange rate for immediate delivery. Forward rate is a contracted rate for exchange at a future date, used by businesses to hedge currency risk. Forward rates reflect interest rate differentials between the two countries.

When are exchange rates best at banks vs. currency services?

Banks and airport kiosks typically offer poor exchange rates with wide spreads. Online services (Wise, Revolut) offer near mid-market rates with transparent fees. Credit cards with no foreign transaction fees often provide the best rates for international purchases.

What is purchasing power parity (PPP)?

PPP is the theory that exchange rates should adjust until a basket of goods costs the same in all countries. The Big Mac Index is a famous PPP benchmark. In practice, rates diverge from PPP due to non-tradable goods, capital flows, and market imperfections.

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Understanding Exchange Rates

An exchange rate tells you how much of one currency you get per unit of another. If USD/EUR = 0.92, one US dollar buys 0.92 euros. Exchange rates fluctuate continuously based on economic conditions, interest rate differentials, and market sentiment.

Getting the Best Rates

Best: Wise, Revolut, or similar services — near mid-market rates
Good: Credit cards with no foreign transaction fee
Fair: Your bank's international wire or debit card
Avoid: Airport kiosks and hotel desks (high spreads)
Never: "No fee" services that hide costs in poor exchange rates