The answer in three lines
- Exchange rates are set in a global dealer market; the mid-market rate sits halfway between the buying and selling price.
- Travel-money counters, cards and transfer services add a markup to that rate, which you can measure in percentage terms.
- Speculative currency trading uses the same prices but adds leverage, spreads and overnight costs, and carries a high risk of loss.
Foreign currency trading happens every time someone swaps pounds for euros at an airport and every time a bank trades billions of dollars for yen. The prices come from the same global market. What differs is the purpose, the size and, above all, how much the provider adds to the rate. This guide explains how that market sets rates, how to measure the cost of converting money, and where speculative trading departs from everyday exchange.
Who sets exchange rates?
Nobody single-handedly. Rates emerge from continuous trading between banks, dealers, companies and investors around the world.
Most major currencies float: their price moves with supply and demand from trade payments, investment flows, central bank policy and speculation. Some countries manage or peg their currency to another, intervening to keep it within a range. Central banks influence floating rates mainly through interest rates and communication. The market runs from Sunday evening to Friday evening New York time, following business hours around the world.
What is the mid-market rate?
The midpoint between the price at which dealers buy and sell a currency, and the fairest benchmark for measuring a markup.
Every currency quote has a bid and an ask. The rate you see in a search result or on a financial news site is usually close to the midpoint. No retail provider will give you exactly that rate; the question is how far away its rate is.
How much does converting money really cost?
Compare the rate you are offered with the mid-market rate at the same moment, then add any fixed fees.
An illustrative example: the mid-market rate is 1.1600 euros per pound, and a travel-money counter offers 1.1200. Converting £1,000 at mid would give €1,160; at the counter it gives €1,120. The €40 difference is a markup of about 3.45%, even if the counter advertises "0% commission".
The same thing happens in reverse. Bringing back €200 when the mid rate is 1.1600 would be worth about £172.41, but a buy-back rate of 1.2000 euros per pound returns only about £166.67.
- Airport and hotel counters tend to carry wide margins because customers have few alternatives.
- Card payments abroad use the card network's rate plus any foreign transaction fee set by your card issuer.
- Dynamic currency conversion, when a shop or cash machine abroad offers to charge you in your home currency, usually comes with a poor rate. Choosing to pay in the local currency is generally cheaper.
- Money transfer services vary widely; compare the total amount received rather than the fee alone.
Why does the rate change during the day?
Because the underlying market trades continuously on weekdays and reacts to every new piece of information.
Economic releases, central bank comments and large commercial payments all move rates, sometimes by a noticeable amount within minutes. Retail providers update their own rates less often, and some widen their margins at weekends when the wholesale market is closed, to protect themselves against a gap when it reopens. If you are converting a large sum, a weekday during the main European and US trading hours is usually when quotes are tightest, although no timing removes the risk that the rate moves against you.
How is speculative foreign currency trading different?
Instead of converting money you need, you take a position on the rate itself, usually with leverage and through a broker.
A speculative trader buying EUR/USD does not want euros; they want the rate to rise so they can close the position at a profit. Retail positions are usually leveraged contracts, sized in lots, and they pay the spread on entry and exit plus overnight financing if held past the daily rollover. Leverage caps for retail clients are 30:1 on major pairs in the UK, EU and Australia and 50:1 in the US. The details are covered in how forex trading works, and the pip calculator shows what each movement is worth.
When does currency risk affect people who never trade?
Whenever income, savings, debts or investments are in a different currency from your spending.
Someone paid in one currency but paying rent in another, a business invoicing abroad, or an investor holding foreign shares all carry exposure to exchange rates. A foreign share can rise in its own market and still lose value in your currency if that currency weakens. Businesses often use forward contracts, agreeing a rate today for a future exchange, to remove that uncertainty; individuals can reduce it by matching the currency of savings to the currency of future spending. The stock market guide touches on currency risk for investors.
A foreign currency trading checklist for travellers and senders
- Look up the mid-market rate just before you convert.
- Ask for the total amount you will receive, not the rate alone.
- Work out the percentage difference from mid, and add any fixed fees.
- Decline dynamic currency conversion abroad and pay in the local currency.
- Avoid last-minute conversions at airports if you can plan ahead.
For hidden costs in trading rather than travel, see trading fees explained.
Follow-up questions
Why is the rate on my card statement different from the one I saw online?
The rate online is usually close to mid-market. Card networks apply their own daily rate, and your card issuer may add a foreign transaction fee, so the amount charged differs.
Is "no commission" currency exchange free?
No. Providers without a commission still earn through the difference between their rate and the mid-market rate. Compare the total amount you receive.
Is buying foreign currency a good investment?
Holding foreign cash usually earns little and exposes you to exchange-rate moves in both directions. Speculating on currencies is high risk, especially with leverage. Nothing on this site is investment advice.