How Exchange Rates Work — A Plain-English Guide
CCW Editorial · 2026-04-02 · 7 min read
Exchange rates feel mysterious, but the mechanics are simple once you strip out the jargon. Here's how currencies actually get priced.
An exchange rate is just a price — the price of one currency, quoted in another. When you see USD/EUR = 0.92, it means one US dollar buys 0.92 euros right now.
Who sets the rate?
Nobody — and everybody. Currencies trade on a decentralized global market made up of banks, brokers, hedge funds, and central banks. Every trade nudges the price.
What moves rates day-to-day
- Interest rates: Higher rates attract foreign capital, strengthening the currency.
- Inflation: Higher inflation usually weakens a currency over time.
- Trade balance: Exporting more than you import tends to support the currency.
- Politics & confidence: Stable governments = stronger currencies.
- Speculation: Roughly 90% of forex volume is speculative, not real-world trade.
Why your bank's rate is different
The 'mid-market' rate (what you see on Google) is the midpoint between buying and selling prices. Your bank adds a margin — sometimes small, sometimes painful — and that's how they make money on conversions.
Fixed, floating and pegged currencies
Most major currencies float: their price is set by supply and demand. Some countries peg their currency to another. The UAE dirham, for example, has been pegged to the US dollar at 3.6725 for decades, so its rate against the dollar barely moves while its rate against the euro moves with EUR/USD. A few currencies are managed within a band set by the central bank.
Reading a currency quote
A quote such as EUR/USD 1.10 names the base currency first and the quote currency second: one euro costs 1.10 US dollars. The inverse, USD/EUR, is 1 divided by 1.10, about 0.909. Dealers show two prices, a bid at which they buy the base currency and an ask at which they sell it; the gap between them is the spread, and the mid-market rate is halfway between.
Why rates differ between websites
Different sites use different sources and update at different times. Some show a live dealer feed, others a daily reference rate such as the European Central Bank's. Small differences are normal; what matters for you is the rate your provider offers, which is why comparing it with the mid-market rate is the useful test.
Putting it into practice
When you need to convert money, look up the mid-market rate, ask your provider for the exact amount you will receive, and work out the margin. The exchange rate markup calculator does that sum for you.