What Determines Exchange Rates?
Currency exchange rates are determined by market supply and demand on the foreign exchange (forex) market—the largest financial market in the world.
Daily Forex Volume: $7.5 Trillion USD
That's more than all US stock markets combined. The entire global economy's currency transactions happen here, 24/5.
Key Factors Affecting Rates
1. Interest Rates
Higher interest rates attract investment, increasing demand for that currency.
2. Economic Growth
Strong GDP growth = stronger currency (investors want exposure).
3. Inflation
High inflation erodes purchasing power, weakening currency.
4. Trade Flows
Countries buying exports need that country's currency, increasing demand.
Real-Time vs Delayed Rates
Real-Time Rates (Interbank)
- • Updated every second
- • Used by banks trading with each other
- • Bid-ask spread: 0.001-0.002%
- • Only accessible to institutions
Consumer Rates (What You Get)
- • 15-30 minute delays common
- • Marked up 1-5% above interbank rate
- • This markup = banks' profit
- • Varies by bank and payment method
Example: Interbank USD/EUR rate: 0.9200. Bank rate: 0.9185 (0.16% markup). You lose $16 per $10,000 transferred.
The Hidden Cost Breakdown
Real-World Cost Comparison: $10,000 USD → GBP
| Provider | You Send | You Receive | Cost | Cost % |
|---|---|---|---|---|
| Interbank (reference) | $10,000 | £8,213 | $0 | 0% |
| Bank of America | $10,000 | £7,960 | $320 | 3.2% |
| Chase | $10,000 | £7,950 | $330 + $45 fee | 3.75% |
| PayPal | $10,000 | £7,887 | $390 | 4.75% |
| Western Union | $10,000 | £7,820 | $460 | 5.6% |
| Wise | $10,000 | £8,184 | $29 | 0.35% |
Note: Rates as of March 2024. USD/GBP interbank rate: 1.2187. Wise uses true interbank rate + small fixed fee.
The Wise Advantage
- • Saves $291 compared to Chase on $10,000 transfer
- • Uses real interbank rate (0.35% fee flat)
- • No hidden markups
- • Transfer arrives in 1-2 business days vs 3-5 days
Understanding the Markup: Where Banks Hide Costs
The Three Ways Banks Make Money
1. Bid-Ask Spread
A bank quotes you 0.9185 to buy EUR, but only pays 0.9200 to sell it. That 0.15% difference is their spread. Invisible to you, but real money.
2. Exchange Rate Markup
"Today's rate is 0.9200" they advertise, but they actually quote you 0.9050 (1.5% markdown). This is buried in small print.
3. Explicit Fees
International transfer fees ($25-$45) are visible, but represent only 0.25-0.45% cost. The markup is usually larger.
Real Example: Chase $10,000 USD → EUR Transfer
- • Quote: "Today's rate: 0.9700" (advertised)
- • Actual rate given: 0.9520
- • Hidden markup: 1.8% (€180)
- • + Explicit fee: $45
- • Total cost: €180 + $45 = ~$229 for $10,000 transfer
When Rates Change: Timing Matters
Short-Term Rate Movements
Currency rates change constantly based on news, economic data, and market sentiment. Major changes can happen within hours.
| Event | Impact on USD | Typical Magnitude |
|---|---|---|
| Fed raises interest rates | Strengthens USD | 0.5-2% |
| Stock market crashes 5% | Strengthens USD (safe haven) | 1-3% |
| Inflation report higher than expected | Weakens USD | 0.5-1% |
| Geopolitical crisis | Strengthens USD | 2-5% |
⚠️ Timing Strategy
For large international transfers ($10,000+), time matters. A 1% rate change on $10,000 = $100 difference. However, predicting short-term rates is near impossible. Better to:
1. Use a service tracking favorable rates weekly
2. Set limit orders (Wise offers this)
3. Don't wait for "perfect" rates—they never come
Real-World Scenarios
Scenario 1: Freelancer Paid in USD, Lives in Canada
Monthly: $3,000 USD → CAD
- • Wise: $3,000 USD = $4,080 CAD (fee: $10)
- • Bank transfer: $3,000 USD = $3,970 CAD (fee: $35)
- • Wise advantage: $110+ per month = $1,320/year
Scenario 2: Student Sending Money Home
Quarterly: $2,000 USD → India (INR)
- • Western Union: $2,000 USD = ₹165,400 (fee: $8, markup: 3%)
- • Wise: $2,000 USD = ₹165,900 (fee: $4)
- • Wise advantage: $40+ per quarter = $160/year
Scenario 3: Business Import/Export
Monthly: €50,000 EUR → USD
- • Bank wire: €50,000 EUR = $54,200 USD (fee: $45, markup: 2%)
- • Wise: €50,000 EUR = $54,800 USD (fee: $50 flat)
- • Wise advantage: $600+ per month = $7,200/year
Conclusion
Key Takeaways:
- ✓ Banks hide 2-5% costs in exchange rate markups, not just fees
- ✓ Wise saves 85-90% on transfer costs vs traditional banks
- ✓ $10,000 transfer: Wise costs $29, Chase costs $375 (12.9x difference)
- ✓ For international freelancers: switching to Wise = $1,000+/year raise
- ✓ Real-time rates exist (interbank), but you don't get them from banks
Use our Currency Converter tool above to compare real-time rates and calculate your actual transfer costs.
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