How Exchange Rates Work and Why Bank Rates Differ
An exchange rate is simply the price of one currency in terms of another. If 1 US dollar buys a certain number of euros, that number is the USD/EUR rate. Behind that simple figure sits the world's largest financial market, a handful of central banks and many layers of fees. This guide explains how rates are formed, what the rates on WorldTimeFX represent, and why your bank's rate is almost always a little worse.
Who sets the rate
For most major currencies, nobody sets the rate directly. It is determined continuously by trading between banks, companies, investment funds and other institutions in the foreign exchange market, which runs around the clock on working days. When more people want to buy a currency than sell it, its price rises; when more want to sell, it falls.
Some currencies are managed more closely. The UAE dirham and the Saudi riyal are pegged to the US dollar at fixed rates. The Hong Kong dollar is kept within a narrow band against the US dollar. China's central bank sets a daily reference point for the yuan and allows trading within a band around it. Singapore manages its dollar against a basket of trading partners' currencies.
What moves exchange rates
Interest rates are one of the biggest drivers. When a central bank raises rates, holding that currency becomes more attractive to savers and investors, which can push its value up. Inflation matters too: a currency whose purchasing power is eroding faster tends to weaken over time.
Trade flows also play a role. Countries that export large amounts of oil, metals or farm goods often see their currencies move with commodity prices; the Canadian, Australian and New Zealand dollars are well-known examples. Political events, economic data releases and changes in global risk appetite can all cause rapid moves. In uncertain times, investors often buy currencies seen as safe havens, such as the Swiss franc, the Japanese yen and the US dollar.
Mid-market and reference rates
At any moment there are two prices in the market: the price buyers will pay and the price sellers will accept. The midpoint between them is the mid-market rate. It is the fairest single measure of a currency's value, but it is a wholesale price that individuals cannot normally trade at.
A reference rate is a snapshot of market rates taken at a fixed time. The European Central Bank publishes reference rates for around 30 currencies against the euro once each working day, in the afternoon Central European Time. WorldTimeFX uses these rates through the Frankfurter service, and fills in currencies the ECB does not cover with data from ExchangeRate-API. Because both sources quote against a base currency, a pair like USD to INR is calculated as a cross rate through that base.
Why your bank's rate is different
When you exchange money, the provider adds a margin to the mid-market rate. You buy foreign currency at a slightly higher price and sell it back at a slightly lower one, and the difference is the provider's profit. Banks, airport kiosks and card schemes often combine this margin with an explicit fee or commission.
The size of the margin varies widely. Specialist transfer services typically charge a small, clearly shown percentage. High-street banks and card issuers can charge more, sometimes several percent, and may not show the margin separately. Airport and hotel exchange desks are often the most expensive. Timing matters too: rates move during the day, so a quote you saw in the morning may not be available in the afternoon.
Using indicative rates sensibly
Reference rates are ideal for budgeting, comparing prices, checking invoices and understanding roughly what an amount is worth. They are not a quote. Before you send money or agree a price, ask your provider for the exact rate and total cost, then compare it with the mid-market figure to see how much you are actually paying.
A good habit is to compare the amount the recipient will receive, after all fees, rather than the headline rate alone. A provider advertising zero commission may simply have built its fee into a weaker exchange rate.