How Does Currency Exchange Work?

What is Currency Exchange?

Currency exchange is the act of trading in one country's money for an equivalent amount in another country's money. For example, when you travel from the United States to Japan, you can't buy goods in Japan with the U.S. dollar. In order to obtain money that's usable in Japan, you have to exchange an amount of U.S. dollars for Japanese yen. According to an online currency exchange calculator, 5 U.S. dollars equals approximately 503 Japanese yen as of April 2009.

The Markets

However, markets can change the exact worth of a currency at any time. If the U.S. dollar loses purchasing power, this means 5 U.S. dollars could drop from getting you 503 yen to only 450 yen. If the U.S. dollar gains purchasing power, you could wind up getting 600 yen for 5 U.S. dollars.

The Transaction

You can use cash, traveler's checks or ATMs to exchange your money for another currency. If you use cash, you would go to a local currency exchange or bank to trade in the money for valid currency. Banks, currency exchanges and ATMs often charge a small transaction fee, however. If you use traveler's checks, you can just fork over a check when making a purchase, and the vendor will give you back appropriate change in local currency. However, some places do not accept traveler's checks, in which case you can also use your credit card. International credit cards like MasterCard and Visa can be used nearly anywhere, and you don't have to worry about currency exchange.