If you plan to send money to the Philippines from the U.S. and have it turned into another currency or into service, a recipient may refuse your deposit because of high fees, low trading volume, and significant banking system issues associated with transactions.
When you convert your money to Philippine pesos for the transfer, it likely will be converted using an exchange rate.
What is an exchange rate?
An exchange rate refers to the value of a currency about another—for example, how many Mexican pesos are equal to one U.S. dollar.
You can also think of an exchange rate as describing how much of one currency can be bought by one unit of another. Outside of international money transfers, these rates are often spoken about in the context of overseas travel.
How are exchange rates set?
For short, the forex market or F.X. is the global marketplace where different currencies are traded, including foreign trade and business.
As the centre of different currencies, its mission is to present all exchange rates for each foreign currency or counter.
Here is an example of how the U.S. dollar, a currency, works with Mexican pesos, which is another country’s currency:
The U.S. dollar price is divided by the number of Mexican pesos needed to purchase one USD unit. In the currency pair above, an American dollar equals $0.22.
Floating Exchange Rate vs Fixed Exchange Rate
You may have heard about how currency prices are calculated worldwide, either based on what is currently being exchanged according to global financial markets or by a government setting the exchange rates. These two international money valuations are “floating rates” and “fixed rates.”
What is a floating exchange rate?
One way to measure exchange rates is through the currency market. These adjustments happen constantly and quickly; they are determined by the demand of a given currency and supply. If demand for a given currency increases, its value will also increase; if demand decreases, its value will decrease quicker.
What causes the currency to change supply and demand?
An increase in exports leads to an increase in demand for a country’s currency. This increase in demand for the currency results in an increased value of that currency. However, there is also decreased use for the currency, and so it may drop back to its normal value when trade with other countries is equalized.
Most countries, including the U.S., the United Kingdom, Mexico, Germany, and Japan, use floating rates, but this is not fixed.
Many countries use a floating, managed exchange rate, also called a “dirty float”. This means an exchange rate adjusts based on the market but can be influenced by the central bank or government.
A pure exchange rate is simply based on supply and demand with no governmental influences; in other words, currencies are not impacted by who makes what.
What is a fixed exchange rate?
An exchange rate is a value that determines the exchange between two currencies when one commodity or asset is on one side and another on the other, but a fixed exchange rate uses a standard set by an international government to determine its currency’s worth. Standardized rates are typically based on the market rates of scarce or easily tradeable resources prevalent in different nations, such as oil or gold. The required setting can be found in most cases with other countries’ exchange rates.
A floating exchange rate is a currency rate that maintains a currency’s value within an acceptable range.
Fixed exchange rates are uncommon today because most countries peg their currency to the U.S. dollar. Belize, Cuba, Qatar, Hong Kong and the United Arab Emirates use the U.S.-dollar rate.