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Understanding Currency Rates
The value of the currency exchange rates are dependent on supply and demand. Currency has a measurable value and is the cost of one foreign currency compared to another. The value of currencies are affected by economic forces like the national economic policy of a country, tax cuts, interest rate changes, import tariffs, people exchanging and trading currency, inflation and confidence in the government.
History of Currency
Centuries ago, gold was the currency used until the early 1930's when the US valued the dollar at $35 per ounce of gold. After World War 2, countries valued their currencies against the dollar which was based against the value of gold. In 1971, the US got rid of the gold standard altogether as the value of the dollar was halved to $70 per ounce of gold. This now enabled market forces to determine the value of the dollar and not gold anymore.
Currency Rates South Africa
When we travel overseas, invest overseas or import from overseas, we need to exchange our currency (the Rand) to the foreign currency. The exchange rates fluctuate daily and in order to change your currency, you need to do a conversion of currency rates. We have all seen the market news or heard it on the radio where the exchange rates are given. The rates given are Market rates and serve as an indication as to how our currency compares to other currencies.
The media rates given are not the rates you will receive when you exchange your currency. Banks and forex bureau's have to add a spread to that rate in order to make a profit. Some providers have large spreads and you will actually get much less than what you should. On top of the spread, commission will also be charged which is standard across the board. The percentage commission charged plays a big part as well as to the value you will receive upon exchange.
The market rate for the US Dollar is 9.0000.
Company A adds a spread of 2% to the rate. They will sell dollars to you at a rate of 9.18 and buy dollars from you at a rate of 8.82.
Company B adds a spread of 3% to the rate. They will sell dollars to you at a rate of 9.27 and buy dollars from you at a rate of 8.73.
So for $1,000, you will pay R9,180 (before commission) and receive R8,820 (before commission) from company A
or for $1,000, you will pay R9,270 (before commission) and receive R8,730 (before commission) from company B.
With the example, you can see what difference a 1% spread can cost you as a customer. Remember that commission will be added onto that figure and the companies also add their own commission charges to the deals.
So, before you engage in a foreign currency transaction, shop around and see how different the exchange rates and commission charges are all around. The consultants won't know the percentage added for the spreads (only the dealers will), but the consultants can tell you what the commission charge percentage is. If the commission charge is more than 2.7%, turn around and run away as you can get a better deal than that.
At fx Online, we charge 2% on commission for travel currency.
Where to get the rate updates and converter
We built a spreadsheet which is linked from dropbox to our website. The sheet gets updated everyday and you can access it at any time by visiting the fx-online.co.za website and clicking on the Rates of Exchange tab. This book has 2 tabs. The exchange rate tab for the exchange rates and a converter which will calculate your transaction for you as per the product of choice. Please note that this is an indication and once you place your order, you will get a quote with a confirmed rate which is in most cases a better rate than the listed rate on the spreadsheet.
In South Africa, we only have 3 currencies which you multiply to get a value. These are the USD (US Dollar), GBP (Brittish Pound), EUR (Euro). So if you see the exchange rate as 9.0000 for USD, you will be paying R9 for every dollar you buy. The same goes for GBP and EUR.
When you work with all other currencies, you will have to divide to get the value. For example, the AUD (Australian Dollar) is quoted as 0.1025. This is the inverted rate and to see how much you will be paying per AUD, you will take 1 divided by 0.1025 which will return a value of 9.7531. The currencies are traded in the inverted state for accuracy and we get the feeds from the trading houses like that, therefor we quote inverted as well.
I hope you have a better understanding of currency rates and please do contact us if you need clarification on currency exchange rates as well as all of your foreign exchange needs.