Currency conversion means converting one country’s currency into the currency of another country. Anyone wanting to buy or sell a product or service in a country has to use the national currency prevalent there. When people travel to another country they have to change their country’s currency into the currency in use in the destination country. Conversion of the currency is a complex process and the exchange rate of a currency fluctuates continuously.
There are various economic, political and natural factors that can affect the currency exchange rate. The foreign exchange market is the biggest financial market in the world used by investors, even though it carries the highest risk among all the investment options. Without conversion of the currency it would be impossible for the governments and large corporations to do international trade. Many companies participate in currency speculation. They want to profit from the fluctuating rates of different currencies.
The fixed value of a currency allows everyone to figure out the amount of currency needed to buy a product or service. People can also check a currency’s relative value to another currency. To keep the exchange rate of its currency stable, the central bank of a country sometimes intervenes to sell or buy particular foreign currencies available to them. This is possible because in any country, the central bank is the largest holder of foreign currencies.
A country may use fixed exchange rate for its currency because of its economic policies or international agreements. There are other countries that allow their currency to float freely in the exchange market. Tourists wanting to visit another country must know the basics of money conversion. Otherwise they will face problems in buying any product or service. If tourists use their credit cards in another country then their transactions may be subject to fees. Over time all these fees add up. The total amount can be quite substantial.
In some countries it is possible to find merchants who charge credit cards in US dollars. This type of system is referred to as dynamic currency conversion. In this situation, buyers do not make payments in the local currency but in the currency of their country where the card was issued. At the same time, such transactions are subject to conversion fees charged by the merchant. This makes it necessary to check all these details with the card issuer before planning the trip to another country.
Mature and economically stable countries use a floating currency conversion system. It is considered more effective and efficient. In such markets, there is automatic correction of the currency value according to the economic conditions and inflation. However, in such a system the exchange rates may occasionally experience wild swings and cause losses to the investor.