This is a question that many currency exchange brokers get asked very often. And it’s not difficult to see why, when just a few percentage points movement can make a huge difference to the amount of money you will receive when making a transfer.
And the fundamental thing to understand is that currency exchange is a true market. That is, the relative values depend on supply and demand, and all currencies have a “price”. It’s exactly the same principle as your local food market. If there’s a strong demand for vegetables for instance, but bad weather has damaged crops thereby reducing supply, then the prices in the market will go up.
Even our own personal transfers can influence the market, to a degree, but it is the bigger buyers and sellers, such as the banks, corporations and even governments that really make a difference to the rates we see. And the values of currency depend on many things, but particularly economic factors and political events.
So let us say that the USA publish their domestic output, employment and growth figures, and that they are much worse than expected. The price of the Dollar will go down very quickly as institutional investors sell their Dollars and look to other markets to invest in where they can get better returns.
That’s an economic factor driving the market. And then imagine there’s a general election in the UK and a new government declares bullish and robust plans to stimulate the market and overhaul the economy. The Pound will quickly strengthen on this news as those corporate investors who sold their Dollars decide to invest in the UK instead. That’s a political factor which has influenced the market.
And of course there are thousands upon thousands of these events occurring every day, no matter how small, which globally influence the market for currencies and thus the exchange rates we are able to obtain.
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This article was written on the 13th of October, 2017.