How Exchange Rates Work

Open any currency converter and you'll see a clean number — "1 USD = 0.92 EUR" — that looks fixed and authoritative. In reality, that figure is the end product of a huge, constantly shifting global market, and it is rarely the exact rate you'll actually pay when you exchange money. Here is what determines it, and why the number on your bank statement is almost always a little worse.

What determines an exchange rate

Most major currencies — the US dollar, euro, yen, pound and so on — are floating, meaning their value is set by supply and demand in the global currency market (the largest financial market in the world, trading trillions of dollars a day). A smaller number of currencies are pegged, meaning a government or central bank fixes the rate against another currency (often the US dollar) and actively intervenes to hold it there.

For floating currencies, a handful of forces push the rate up or down day to day and year to year:

• Interest rates. When a country's central bank raises interest rates, its currency tends to attract more foreign investment (savers and funds chase the better return), which increases demand and strengthens the currency. Rate cuts tend to have the opposite effect.
• Inflation. Currencies losing purchasing power quickly at home tend to weaken abroad too — high inflation erodes confidence and buying power, so other countries need less of that currency to buy the same goods, and traders adjust the exchange rate accordingly.
• Trade balances. A country that exports far more than it imports sees steady foreign demand for its currency (buyers need it to pay for those exports), which supports its value. A persistent trade deficit works the other way.
• Economic and political stability. Currencies from politically stable, transparent economies are generally seen as safer to hold, so uncertainty, instability or unexpected shocks abroad often trigger swings even without any change in a country's own economy.
• Central bank and government action. Beyond interest rates, central banks sometimes buy or sell their own currency directly, or make policy statements, specifically to influence its value.

None of these move in isolation — currency prices react constantly to new data, news and expectations, which is why rates shift by the second during trading hours.

The mid-market rate vs the rate you're actually charged

The number you see in a converter (like the one in our currency converter) is typically the mid-market rate — the midpoint between the buy and sell price currently trading on the wholesale currency market. It is the rate banks and large institutions trade at with each other, and it's the fairest, most transparent reference point for what a currency is "really" worth at that moment.

It is not, however, the rate you'll get at a bank counter, an airport kiosk, or on your debit or credit card statement. Retail providers add a spread — a markup built into the exchange rate itself, separate from any flat fee they might also charge — as their profit margin for the conversion. Typical markups run:

• ~0.5–2% for many everyday debit/credit cards and modern fintech apps.
• ~2–4% for most traditional banks on international transfers or card purchases.
• ~5–10%+ for airport currency exchange counters and some cash kiosks — often the worst rates available.

A 3% markup sounds small, but on a $2,000 transfer that's $60 disappearing before either side even sees a separate "fee" line item — which is exactly why the spread is easy to miss.

How to get a better rate

• Compare the rate to the mid-market rate, not just the fee. A provider advertising "no fees" can still bake in a wide spread. Check the actual exchange rate offered against a live mid-market reference before assuming it's a good deal.
• Use a card built for travel. Many modern travel and fintech cards charge little to no markup over the mid-market rate, compared to a typical bank card's 2–4%.
• Avoid airport and hotel kiosks. They rely on convenience and consistently offer some of the worst rates — exchange only what you need to get to a better option, if any at all.
• Say no to "dynamic currency conversion." When paying by card abroad, you're sometimes asked whether to pay in your home currency instead of the local one. Always choose the local currency — the "convenience" of seeing your home currency comes with an inflated exchange rate set by the merchant, not your card network.
• For larger transfers, use a dedicated transfer service. Specialist money-transfer providers generally offer tighter spreads than a traditional bank wire, especially for amounts in the thousands.
• Time isn't usually worth chasing. Rates fluctuate constantly, and trying to "time the market" for a slightly better rate on a routine purchase rarely outweighs the spread you're already paying — the bigger lever is almost always choosing a low-markup provider in the first place.

Why the number in this tool might differ from what you're charged

Our currency converter uses the mid-market rate, refreshed roughly once a day. That makes it a solid reference for understanding value and comparing offers — but it will always look slightly better than what a bank, card or cash counter actually gives you, for the spread reasons above. Use it to sanity-check a quote, not as a guarantee of the rate you'll receive.

It's also worth remembering that exchange rates only tell you what your money is worth in another currency today — they say nothing about what that money will buy over time at home. For that longer-term picture, see how inflation erodes purchasing power even without ever changing currencies.