Finance & Time · 5 min read
How Currency Exchange Rates Work
Why does 1 USD equal 0.92 EUR today but something different tomorrow? Here's how exchange rates are set and why they fluctuate constantly.
What Determines Exchange Rates?
Exchange rates reflect the value of one currency relative to another. In a floating exchange rate system (used by most major economies), rates are driven by supply and demand in global forex markets — the largest financial market in the world, trading over $7 trillion per day.
Key factors that move exchange rates:
- Interest rates — Higher rates attract foreign investment, strengthening the currency
- Inflation — High inflation weakens purchasing power and the exchange rate
- Economic data — GDP growth, employment reports move rates
- Political stability — Uncertainty weakens a currency
- Trade balance — Countries that export more have stronger currencies
Mid-Market Rate vs Bank Rate
| Rate Type | What It Is | Who Uses It |
|---|---|---|
| Mid-market rate | Midpoint between buy & sell — the "real" rate | Reuters, Google, PickConverter |
| Bank/exchange rate | Mid-market + markup (1–5%) | Banks, airports, ATMs |
| Credit card rate | Usually close to mid-market + small fee | Visa, Mastercard |
Tip: Always compare the rate you're offered to the mid-market rate. A 3% spread on a $1,000 transfer costs you $30.
Frequently Asked Questions
Supply and demand in global forex markets, driven by interest rates, inflation, economic data, political stability, and trade balances.
Forex markets trade 24 hours a day, 5 days a week. Economic news and events cause constant rate movements.
The midpoint between buy and sell prices — the fairest rate. Banks add a markup; services like Wise or PickConverter show you the mid-market rate.
Use PickConverter's free Currency Converter for live rates across 160+ currencies. Instant, no sign-up.
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