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The Basics of Exchanging Currency

People need to have access to foreign currency in order to purchase goods when traveling abroad. However, exchanging currency can be a bit confusing. Taking time to understand the facts about exchanging currency is important.

The Currency Exchange

Currency exchange can also be referred to as currency conversion. This is the process of exchanging money for an equivalent amount in another currency. Conversion rates are dictated by the global currency market.  U.S. dollars, British pounds and Japanese Yen are among the major currencies that are commonly converted. The exchange rate is the term used to describe the difference between their relationships.

The Process of Exchanging Currency

There are many financial institutions and businesses that have the ability to convert currency. Credit unions, banks and credit card networks can all convert money. Currency exchange operators that can be found in train stations and airports also have the capacity to change money. These facilities offer their own exchange rates with corresponding charges.  The process actually depends on the operator preferred.  Currency can also be exchanged online. In fact, some banks allow their account holders to exchange money via the Internet. On the other hand, credit card networks automatically exchange money every time people purchase goods in a foreign currency. There are extra charges for this.

Factors Affecting Currency Rates

The law of supply and demand has something to do with the fluctuating exchange currency rates. This concept explains the difference between the available currency and the number of people who need it. A currency becomes more valuable when there are a lot of people who need it and the availability of the currency is limited. As a result, the demand goes higher. The relationship between the currency’s value and exchange rates is inversely proportional. Therefore, the rates go down when the currency value goes up.

A currency loses its value when the supply is higher than the demand. This will have a negative impact on the price of goods and services as they go up in order to compensate. This is referred to as inflation, and it can reduce a currency’s value compared to the other countries’ currencies. Interest rates, trade balance and investor confidence are the other factors that affect currency exchange rates. These factors slow down trade and decrease the demand for more currency.

Finding the Cheapest Way to Exchange Currency

Using credit cards for foreign exchange is said to be the cheapest way of converting currency. However, this depends on the type of credit card used. Credit cards with no international fees are becoming more popular today. Travelers can avoid the hefty foreign transaction fees by simply obtaining these cards. With this, they can also save more than 8 percent from the currency conversion services offered by banks and network currency exchange operators. Another option is to use credit card networks that have extensive coverage such as Visa and MasterCard.

Travelers should make sure that they understand all the transactions they will need to make in foreign currency. This can include paying for flight tickets and hotels. Planning any trip abroad requires exchanging currency. Doing some research over the Internet provides people with an idea of current exchange rates. With this, travelers can prepare their currency and plan on where they will convert their cash.

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