How to convert currencies and understand exchange rates
What exchange rates are, how to convert in both directions and why your bank gives you another price.
Table of contents
What the exchange rate is
The exchange rate is the price of one currency expressed in another. When you read EUR/USD 1.08 it means 1 euro equals 1.08 dollars. The first currency is the base and the second is the target.
Converting in both directions
To go from base to target, multiply. To go back, divide. Example: with EUR/USD at 1.08, converting 500 € is 500 × 1.08 = $540. And $540 back is 540 ÷ 1.08 = €500. There is no more mystery to it.
The currency converter does this calculation instantly with updated rates, in both directions.
Why the price never stops moving
Currencies trade 24 hours a day on supply and demand: interest rates, inflation, economic data and even politics move pairs every minute. That is why yesterday’s conversion may not hold today, and why it pays to use updated rates instead of a number from memory.
Your bank’s margin
The rate you see in the converter is the interbank one; your bank or exchange bureau applies a margin and gives you a worse price. Before changing large amounts, compare: between the airport and your online bank the difference can be several percentage points.