Currency converter how does it work

That reduces the supply in the marketplace, boosting its currency's value. It also increases the supply of dollars, sending its value down. If demand for its currency rises, it does the opposite. The Chinese yuan used to be a fixed currency. Now, the Chinese government is slowly transitioning to a flexible exchange rate.

That means it changes less frequently than a flexible exchange rate, but more frequently than a fixed exchange rate. Since February , the U. One U. The U. Most exchange rates are given in terms of how much a dollar is worth in the foreign currency.

The euro is different. It's given in terms of how much a euro is worth in dollars. It is hardly ever given the other way around. The euro has weakened considerably since April Since then, the future of the European Union and the euro itself was in doubt after the United Kingdom voted to leave the European Union.

This reduced bank rates for anyone lending or saving in euros. That reduced the value of the currency itself. The ECB announced its version of quantitative easing in March Yet, the euro is special. It's the second most popular currency after the dollar. More than million people use it as their sole currency. It's one of the largest economies in the world. Interest rates, money supply, and financial stability all affect currency exchange rates. Because of these factors, the demand for a country's currency depends on what is happening in that country.

First, the interest rate paid by a country's central bank is a big factor. The higher interest rate makes that currency more valuable. Investors will exchange their currency for the higher-paying one. They then save it in that country's bank to receive the higher interest rate.

Second, is the money supply that's created by the country's central bank. If the government prints too much currency, then there's too much of it chasing too few goods. Currency holders will bid up the prices of goods and services. That creates inflation. If way too much money is printed, it causes hyperinflation.

Hyperinflation usually only happens when a country must pay off war debts. It's the most extreme type of inflation. Some cash holders will invest overseas where there isn't inflation, but they'll find that there isn't as much demand for their currency since there's so much of it.

That's why inflation can push the value of a currency down. You can do this yourself without the help of a currency converter, but it takes some basic math you learned in school that many of us have probably forgotten. To calculate this, follow one of these steps:. Multiply across left to right and divide across right to left. The currency at the end of the direction is the desired output of the calculation.

Currency traders on the other hand pay attention to each decimal point in the transaction. If you begin trading and collecting currencies, you can easily see how you can quickly compare currencies as you make decisions on whether to buy or sell a currency. They help you identify conversion spreads, and these can be important to your pocketbook.

The difference between the currency market and what your bank delivers is called a conversion spread. Banks and payment providers will add a markup on the price so they make a profit on the transaction. At the bank though, it may cost 1. The difference between the market exchange rate and the exchange rate they charge is their profit. To calculate the percentage discrepancy, take the difference between the two exchange rates, and divide it by the market exchange rate: 1.

Multiply by to get the percentage markup: 0. The markup will be present regardless which direction of conversion you make. Whenever you trade or exchange currency, keep a sharp eye on the markup. Now you know the math, and can determine the markup percentage. The currency converter below shows a good example.

Here, the market spread is outlined in the red box. When comparing currency exchangers, make sure to look at spreads and other services like fully insured home delivery or e-check payments for your order.

You can order foreign currency online and have your money shipped straight to your door in hours. The first-mentioned currency is conventionally the base. Note the ordering of the currencies in the exchange-rate quote. We saw that the first-mentioned currency is the base. In our example, this is the barrel of oil. Currencies are conventionally quoted the other way round.

This can make FX tricky. Again, the base currency is the first mentioned. So long as we apply either of the quotes correctly, they will each produce exactly the same results, subject to any minor rounding differences. Base jumping is also an exciting extreme sport. Having identified the base currency in our exchange rate, we need to apply it the right way round.

One reliable method is to follow the rule in the following:. To convert from the base currency, we multiply by the exchange rate. Just like multiplying to apply a commodity price.