What is Foreign Exchange?
Foreign exchange, commonly known as Forex or FX, refers to the worldwide electronic marketplace for trading currencies. Trillions of dollars are exchanged each day, making the FX market the world’s largest and most liquid trading market. Unlike the stock market, which is open during set hours (8am – 16:30pm in the UK, 8am-20.00pm in Europe), the Forex market is open 24 hours, five days a week, apart from public holidays.
What makes a currency strong or weak?
A currency’s strength is largely down to supply and demand, and there are lots of things that can impact this. If a currency’s demand increases and investors buy more of it, the value of that currency will go up. Similarly, if the demand decreases and more investors sell that particular currency, its value goes down.
For example, on the 10th of August 2023, the euro strengthened against the US dollar (EUR/USD) shortly after US inflation data released by the US Bureau of Labor Statistics came in much lower than many international investors predicted. Market watchers took this as a signal that the US Federal Reserve bank would be less likely to raise interest rates in its next meeting (as inflation is cooling). The lower-than-expected interest rate meant that many investors perceived a lower return on their USD investment, causing them to sell their dollars and buy a safer currency, like the euro. Other factors that impact a currency’s value include:
Gross Domestic Product (GDP) data can give us an indication of a country’s economic performance. If a country’s GDP is growing, then this is a good sign and can help boost the value of its currency. This happened on Friday 11th August 2023, after the Office for National Statistics released better-than-expected GDP results for the UK. GDP rose by 0.4%, which triggered the pound to rise against the euro (from the 1.15 mark, to the 1.16 mark within 24 hours). On the other hand, if a country’s economic performance slows down, or heads into negative territory (recession), this can cause the value of that currency to fall.
Political stability or instability
Countries that are politically peaceful and have secure, transparent systems are more likely to be attractive to international investors, and will therefore have stronger currencies. An example of this can be seen looking at the euro, which depreciated in value against the US dollar in the first 8 months after Russia’s invasion of Ukraine. EUR/USD sat around the 1.14 mark in February of 2022 and fell to 0.96 by October that same year.
Countries with lower inflation rates are more likely to be seen as attractive by global investors, whereas those with higher rates tend to be less appealing. As a result, countries with lower inflation tend to see a boost in the value of their currency, whereas those with higher inflation see a depreciation. For example, on November 16th, 2022, the UK’s inflation rate rose to over five times the Bank of England’s 2% target, reaching 11.1% in October 2022. As a result, the pound fell to 1.18 against the US dollar, from the 1.34 it hit the previous year.
Can exchange rates impact my business?
As a business owner, you might be asking if exchange rates can affect your business. The answer to that question, is yes. In addition to other types of financial risk, the foreign exchange market is a volatile place, exposing businesses that make cross-border payments, to potential losses on their revenue. So, whether you’re buying supplies in bulk, accepting overseas payments from your customers, or paying local staff, those transactions are exposed to currency rate volatility, which can eat away at your profits – and unfortunately, smaller businesses are more likely to feel the effects of this.
European companies incurred around $4.03bn worth of FX-related losses in Q1 2023
At the start of the year, Kyriba reported that FX volatility caused businesses across the globe $22.5 billion in the first three months of 2023 alone. For European companies in particular, there was a 33% increase in negative currency impacts – around $4.03 billion in foreign exchange-related losses.
Imagine you’re a French-based international talent agency that needs to pay salaries to your employees in Switzerland. The EUR/CHF exchange rate over the past two years has weakened by over 10%. This means that on a business transaction of €100,000, over €10,000 could have been lost due to fluctuating rates during that time span – meaning a €10,000 loss on those salaries! For a small to medium-sized enterprise, or scale-up in its first two years of business, a €10,000 loss plus other regular costs, could really impact growth.
Open a 3S Money International Business Account for bank-beating FX rates
Thankfully, 3S Money offers bank-beating foreign exchange rates plus expert support for businesses transacting across borders.
There are several benefits to choosing 3S Money as your international business banking solution:
- Receive unparalleled support from a dedicated client manager.
- Benefit from bank-beating foreign exchange rates.
- Send, receive and exchange money in 190+ countries, with access to 65+ currencies.
- Gain total control of all your global business accounts, from one local account.
- Pay only $1 for SWIFT transfers.
You can open a 3S Money International Business Account in three simple steps:
- Check your eligibility to get pre-approved in as little as 15 minutes
- Apply for an International Business Account
- Receive a welcome call from our team who will review and confirm your application
65% of businesses we surveyed said exchange rate fluctuations impact their operations
We conducted a survey to find out just how much of a problem FX is for businesses, and 65% said exchange rate fluctuations impact their operations. Not only this, but 73% of respondents said they consider their company’s exposure to foreign exchange every 30 days when paying invoices or collecting receivables (while 6% said they consider it every 7 days).
With currency rates fluctuating daily, even 30 days could be too long of a gap to leave when thinking about (and planning for) foreign exchange exposure. Thankfully 3S Money’s skilled team of account managers take care of our client’s foreign exchange requirements, making sure you get the best rates.
Reach global markets with a 3S Money International Business Account
Ready to expand into new international markets and enjoy bank-beating FX rates? Check your eligibility today. You can be pre-approved for one of our global business accounts in as little as 15 minutes.
FX: Frequently asked questions (FAQs)
Foreign exchange (FX) risk refers to losses you can incur on international transactions, due to fluctuating currencies.
There are three main types of FX risk: Transaction risk, which happens whenever you agree to make a transaction using a foreign currency. Translation risk, which affects companies with subsidiaries in other countries, and economic risk, relating to the large macroeconomic changes in the market. Visit our Help Centre for more information on FX risk.
3S Money supports over 65+ different currencies across 190 countries. Learn more about 3S Money International Business Accounts.