You're booking a flight, shopping from an overseas store, or sending money internationally. The displayed price in one currency needs to become a real number in yours — but how accurate is the conversion, and are you getting a fair rate?
Exchange rates are deceptively simple on the surface and complex underneath. This guide explains how currency conversion works, where rates come from, why they differ between providers, and how to minimise the cost of converting money.
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How Exchange Rates Work
An exchange rate is the price of one currency expressed in another. If the GBP/USD rate is 1.27, one British pound buys 1.27 US dollars.
The Mid-Market Rate (Interbank Rate)
The mid-market rate — also called the interbank rate or spot rate — is the midpoint between the buy and sell prices currencies trade at between banks. It's the "true" exchange rate you see on financial data providers like Reuters, Bloomberg, or Google Finance.
This rate is not available to retail customers. Banks and money transfer providers add a margin on top of the mid-market rate, which is where they make money on currency conversion.
The Spread
The spread is the difference between the rate a provider buys currency at and the rate they sell it to you. A provider might buy USD at 1.25 and sell at 1.29 when the mid-market rate is 1.27 — pocketing 0.02 on each pound converted.
A 2% spread on a £1,000 transfer = £20 lost to the exchange rate alone, before any visible fees.
Types of Exchange Rates
| Rate Type | Description | Who Offers It |
|---|---|---|
| Mid-market rate | The true midpoint rate | Interbank market only |
| Retail bank rate | Often 2–4% worse than mid-market | High street banks |
| Airport / bureau rate | Often 5–10% worse | Airports, tourist exchange kiosks |
| Credit card rate | Close to mid-market + 1.5–3% fee | Depends on card |
| Specialist transfer rate | Close to mid-market + small fee | Wise, Revolut, etc. |
Fixed vs Floating Exchange Rates
Floating rates (most major currencies): The exchange rate is determined by supply and demand in the foreign exchange (forex) market. The EUR/USD rate moves constantly throughout trading hours based on economic data, geopolitical events, investor sentiment, and capital flows.
Fixed (pegged) rates: Some countries peg their currency to a major currency (usually USD). The government or central bank maintains the exchange rate within a narrow band by buying or selling its own currency. Examples: UAE Dirham (pegged to USD), Saudi Riyal, Hong Kong Dollar.
Managed float: Many currencies fall between — they float but central banks intervene when rates move outside a desired range.
What Moves Exchange Rates
Exchange rates reflect the relative economic health and risk profile of two countries:
| Factor | Effect |
|---|---|
| Interest rate differentials | Higher rates attract capital inflows, strengthening the currency |
| Inflation | Higher inflation erodes purchasing power, weakening the currency |
| GDP growth | Strong growth signals a healthy economy, supporting the currency |
| Trade balance | Surplus countries (more exports than imports) see demand for their currency |
| Political stability | Uncertainty drives capital away, weakening the currency |
| Central bank policy | Rate hikes or cuts signal economic direction |
| Market sentiment | Risk-on vs risk-off periods affect "safe haven" currencies (USD, CHF, JPY) |
The True Cost of Currency Conversion
The headline exchange rate rarely tells you the full story. Total conversion cost = spread + flat fees + receiving fees.
Example: Sending £1,000 to the US
| Provider | Rate (mid = 1.2700) | Fee | USD received |
|---|---|---|---|
| High street bank | 1.2300 | £5 | $1,224.40 |
| Airport kiosk | 1.1900 | £0 | $1,190.00 |
| Specialist service | 1.2680 | £3 | $1,264.36 |
| Credit card (no forex fee) | 1.2630 | £0 | $1,263.00 |
On a £1,000 transaction, the difference between the worst and best option is over £65 — nearly 7% of the original amount.
Practical Tips for Getting the Best Exchange Rate
1. Always compare against the mid-market rate
Use a financial data source (Google Finance, XE.com) to see the real rate. Then calculate what percentage the provider's rate differs by.
2. Avoid airport and hotel currency exchange
Spreads are typically 8–12% at airports. Exchange before you travel or use a debit card at a local ATM.
3. Use a specialist money transfer service for large amounts
Services like Wise (formerly TransferWise), Revolut, and OFX offer rates much closer to mid-market than banks. On transfers above £500, the difference is significant.
4. Check whether your credit card charges foreign transaction fees
Many travel credit cards charge 0% foreign transaction fee and convert at near-mid-market rates. This is often the best option for overseas card payments.
5. Pay in local currency, not your home currency (avoid DCC)
When abroad, always pay in the local currency. When card terminals offer to charge in your home currency ("Dynamic Currency Conversion"), decline — the rate used is always unfavourable.
6. For regular transfers, consider a forward contract
If you regularly send money internationally (e.g., overseas salary or property payments), a forward contract locks in today's rate for a future date, protecting against adverse rate movements.
Common Currency Pairs
| Pair | Name | Countries |
|---|---|---|
| EUR/USD | "Euro" | Eurozone / United States |
| GBP/USD | "Cable" | United Kingdom / United States |
| USD/JPY | "Dollar-Yen" | United States / Japan |
| USD/CHF | "Swissy" | United States / Switzerland |
| AUD/USD | "Aussie" | Australia / United States |
| USD/CAD | "Loonie" | United States / Canada |
| USD/INR | — | United States / India |
| EUR/GBP | — | Eurozone / United Kingdom |
Privacy Note
FluxToolkit's currency converter retrieves exchange rate data to perform conversions. The amounts you enter are processed locally in your browser and are not stored or logged on our servers.
Frequently Asked Questions
Why is the rate I get worse than the one I see on Google?
Google shows the mid-market (interbank) rate — the wholesale rate between banks. Retail providers add a margin (the spread) to make money. No retail provider offers the exact mid-market rate.
How often do exchange rates change?
Major currency pairs (EUR/USD, GBP/USD) change every second during forex trading hours. The forex market operates 24 hours a day, 5 days a week, from Sydney open on Monday to New York close on Friday.
Is it better to exchange money before or after travelling?
Generally, exchanging at your destination's ATMs gives better rates than airport kiosks. Ordering currency from your bank before travelling is usually better than exchanging at the airport. Using a no-foreign-fee debit card abroad is often the best option.
What does the "interbank rate" mean?
The rate banks charge each other when trading large volumes of currency. It's the best available rate — the baseline the retail market prices from. It's not available for individual transactions.
Should I convert currency at my bank?
Banks typically offer rates 2–5% worse than mid-market. For occasional small amounts, this may be acceptable. For larger transfers, specialist services save meaningfully.
Does FluxToolkit store the amounts I convert?
No. Amounts entered are used only for the calculation and are not transmitted to or stored on our servers.
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