What is an Exchange Rate?

Exchange rates determine, among other things, a nation's economic strength. The stronger a currency unit is against another country's affect not only product costs but also the country's credit rating. On a smaller scale, the exchange rate determines how much a visitor will pay for goods and services in the visited country.

Definition

By its most basic definition, an exchange rate determines the per-unit value of one country's currency as compared to another country's currency. For example, $1.00 AUD could hypothetically exchange for 1.45 Euros.

Application

Knowing the exchange rate when travelling assists the visitor determine a relative value when purchasing something in a local market. For example using the same hypothetical exchange rate, above, an article of clothing would cost $10 AUD; if charged more than 14.50 Euros for a comparable item, the clothing is more expensive in the foreign country; if less than 14.50 Euros, the article is less expensive in the foreign country.

Fluctuation

Because a myriad of factors contribute to currency strength and exchange rates, comparative rates of the Australian dollar can differ from day to day and sometimes hour to hour. However, local economies don't generally adjust more often than daily.

When changing local currency back to Australian dollars, the rate may not equal the initial transaction rate. Know in advance what the current rate is and use good judgement in timing. The difference could be favourable, but it could also mean receiving considerably less than expected.

Legitimate v Illegitimate Currency Exchange

Financial institutions and some larger hotels and casinos are licensed to exchange currency. Never use a black market exchange source, because not only are those sources not licensed and the exchange would, therefore, be illegal, black market exchange sources are sometimes sources of laundering money or circulating counterfeit bills.

If a local source is legitimate, the vendor may charge an exchange fee or distribute a rate favourable to the vendor. While some may allow or welcome negotiation, it's a rare event when the informal exchange rate meets the official rate.

Conclusion

Travellers to foreign countries often find it more convenient to remit purchase prices in local currency, but know in advance what the exchange rates are and where to obtain the most reliable exchange rate possible. Beware of fraudulent currency exchange. The consequences could cost more than a few dollars.