Currency Converter

Fixed and floating exchange rates represent two different systems for determining a currency's value:

• Fixed exchange rate: The currency's value is pegged to another currency (often the US dollar) or to a commodity like gold. The central bank intervenes in the forex market to maintain this rate within a narrow band.
• Floating exchange rate: The currency's value fluctuates freely based on supply and demand in the foreign exchange market. Most major economies use floating rates.

Examples:

• Fixed: Hong Kong dollar (pegged to USD), Saudi riyal (pegged to USD)
• Floating: US dollar, euro, British pound, Japanese yen
• Managed float: Singapore dollar, Chinese yuan (float within controlled bands)

Countries may choose fixed rates for stability but sacrifice monetary policy freedom, while floating rates allow economic adjustment but may introduce volatility.

To get the best currency exchange rates when traveling, consider these options in generally descending order of favorability:

1. Specialized money transfer services: Companies like Wise (formerly TransferWise) or Revolut often offer rates close to the interbank rate with transparent fees
2. ATM withdrawals with no-foreign-fee cards: Using cards specifically designed for travel can provide good rates, though local ATM fees may apply
3. Local banks in your destination: Often provide better rates than tourist-area exchange offices
4. Credit cards with no foreign transaction fees: Convenient and typically offer good exchange rates
5. Airport kiosks and tourist area exchanges: Generally offer the worst rates (sometimes 5-15% worse than the market rate)

Tips to maximize your exchange rate:

• Always pay in local currency when using credit cards abroad (decline dynamic currency conversion)
• Compare rates and fees before exchanging large amounts
• Exchange some money before traveling for immediate expenses
• Consider using multiple methods based on the situation

Central banks can influence exchange rates through several mechanisms:

• Interest rate adjustments: Higher interest rates typically attract foreign capital, strengthening the currency. Lower rates tend to weaken it.
• Direct intervention: Buying or selling their own currency in the forex market to influence its value.
• Currency reserves management: Building up or releasing reserves of foreign currencies to affect supply and demand.
• Quantitative easing/tightening: Increasing or decreasing the money supply, which indirectly affects exchange rates.
• Verbal intervention: Public statements about desired exchange rate levels (sometimes called "jawboning").

For example, when Japan wants to weaken the yen to help its exporters, the Bank of Japan might:

1. Sell yen and buy foreign currencies (direct intervention)
2. Lower interest rates to reduce the appeal of yen-denominated assets
3. Implement quantitative easing to increase the yen supply

Central banks typically intervene to prevent excessive volatility, maintain competitiveness, or achieve specific economic objectives.

The foreign exchange (forex) market is a global, decentralized marketplace where currencies are traded. It has several distinctive characteristics:

• Size: The largest financial market in the world, with daily trading volume exceeding $6.6 trillion
• Hours: Operates 24 hours a day, five days a week, following the global business day (closes only on weekends)
• Decentralization: No central exchange; trading occurs electronically over-the-counter between banks and brokers worldwide
• Participants: Commercial banks, central banks, investment firms, corporations, governments, and individual traders
• Trading pairs: Currencies are quoted in pairs (EUR/USD, GBP/JPY, etc.) expressing the value of one currency in terms of another

Major forex market centers include London, New York, Tokyo, Singapore, and Hong Kong. The market is divided into tiers:

• Interbank market: Where large banks trade directly with each other
• Wholesale market: For transactions between banks and large institutions
• Retail market: Where smaller entities and individuals trade through brokers

Currency trading serves various purposes, including international trade, investment, speculation, and hedging against exchange rate risk.

International remittances (money transfers between countries) involve several steps and potential fees:

1. Initiation: The sender provides funds in their local currency to a remittance service provider
2. Currency conversion: The provider converts the money from the sender's currency to the recipient's currency
3. Transfer: The provider sends the converted amount through its network
4. Delivery: The recipient receives the funds in their local currency

Fees and costs typically include:

• Upfront fees: Fixed or percentage-based charges for processing the transfer
• Exchange rate margin: The difference between the mid-market rate and the rate offered by the provider (often the largest hidden cost)
• Receiving fees: Some banks or agents charge recipients for collecting funds

Popular remittance channels include:

• Traditional money transfer operators: Western Union, MoneyGram
• Digital remittance services: Wise, Remitly, WorldRemit
• Bank transfers: SWIFT or international wire transfers
• Mobile money services: M-Pesa, PayPal
• Cryptocurrency-based transfers: Increasingly used for cross-border payments

The World Bank estimates that the global average cost of sending remittances is around 6.4% of the amount sent, though this varies widely by corridor and provider.

Purchasing Power Parity (PPP) is an economic theory that suggests exchange rates should equilibrate to allow the same goods to cost the same amount in different countries when prices are expressed in the same currency.

The fundamental principle of PPP is based on the "law of one price," which states that in the absence of transaction costs and trade barriers, identical goods should sell for the same price across markets.

PPP differs from market exchange rates in several ways:

PPP is commonly used for comparing standards of living across countries and for estimating the "real" value of a currency. The World Bank and IMF use PPP calculations when comparing economic output across nations to provide a more accurate picture of relative economic strength.