Foreign exchange

Foreign exchange is the system by which one currency is converted into another. When you travel abroad, send money internationally, or a company imports goods from another country, someone has to exchange one currency for another at an agreed rate. That rate, called the exchange rate, reflects what the market will pay for that currency at that moment. The forex market is where these exchanges happen, and it operates continuously across the world's financial centers.

It determines what your money is worth outside your home country. If you travel, work abroad, receive remittancesTermRemittances×التحويلات الماليةMoney sent from one person to another, typically across borders, to support family or repay a debt.Open the term, or hold investments denominated in another currency, the exchange rate decides how much purchasing power you actually have. A weak exchange rate makes foreign goods and services more expensive for you; a strong one makes them cheaper. For anyone holding savings or income in a currency different from where they spend, the exchange rate is a direct line item on their household finances. It also matters because the rate moves constantly. Money you are planning to send abroad in three months will arrive at a different rate than it would today, and that difference can be significant.

• Exchange rates are quoted in pairs: one currency per unit of another. A rate of 3.75 means one unit of the first currency buys 3.75 of the second.
• Banks, money transfer companies, and online platforms all quote different rates for the same currency pair. The difference is their profit margin, called the spread.
• The mid-market rate, published by central banksTermCentral bank×البنك المركزيThe government's bank, which controls the money supply, sets interest rates, and oversees all other banks in the country.Open the term and financial data providers, is the true market rate. Retail rates are always worse: you pay more to buy foreign currency and receive less when you sell it.
• Exchange rates move for many reasons: interest rateTermInterest rate×سعر الفائدةThe percentage of principal charged by a lender or paid by a saver, usually stated as an annual rate.Open the term changes, inflationTermInflation×التضخّمA general rise in prices over time, so one riyal today buys less than it did a year ago.Open the term differentials, political events, and shifts in trade flows. No single factor controls them.