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What is the Euro Exchange Rate and How Does It Work?

Vacationers Drinking Wine

Whether you are relocating to Europe or just visiting, the Euro exchange rate will have a big impact on your day to day spending.

As a resident of Germany working for an American company, I get paid in U.S. dollars, which requires me to exchange dollars for Euros when making purchases on the German economy or paying rent or other bills. When I make large purchases, — say over €500 —  I always take the daily Euro exchange rate into consideration. The daily exchange rate can mean a difference of $10-20 just by having the rate drop or rise a couple of points.

You might be wondering: What is an exchange rate, and how does it work?

An exchange rate is the value of one currency in relation to another currency and in this case, USD to Euros and vice versa.

Exchange rates fluctuate daily and are due to supply and demand. If demand is high, the price goes up for that currency, and if it goes down, it will cost less. Factors that come into play for exchange rate fluctuations are government actions, consumer spending, and/or political upheaval. The supply of money and the interest rates of that country’s central bank are major factors that the government uses to manipulate the economy and, in turn, affect the domestic currency.

Service Credit Union, as well as all other financial institutions operating overseas on a U.S. military installation, purchase foreign currency at a rate known as the wholesale rate or purchase rate. This rate is set by and agreed upon between the host nation and the U.S. government. This is like a deli owner loading up on pickles at a wholesale market – items are bought at a wholesale price to sell for profit. In this case, the profit to sell Euros is to cover the administrative costs.

The Individual Rate is the rate that you will most commonly use. It is the rate at which you will purchase your euros. Purchasing or spending €500 at the exchange rate (as of 08/05/2020) of €0.8278 will cost you $604.01.

Here is how the formula works: Euro Amount divided by the Individual rate = USD Amount.

Say you were purchasing your Euros the day prior at the Individual Rate of €0.8308, your €500 will cost you $601.83. That is a difference of $2.17 due to the rate fluctuating. The exchange rate can affect your monthly rent significantly.  

The reconversion rate is the rate at which the financial institution will exchange your Euros for dollars. If you walked in with €500, and the exchange rate for that day was €0.8702 (as of 08/05/2020), you will get $574.58. You can calculate what you will get back by taking the euro amount and dividing it by that day’s reconversion rate.    Amount in Euros divided by Reconversion rate = USD Amount.  

Say you and a friend went out for lunch and they forgot their wallet at home. Your total bill for lunch came out to €50 for two people.  They agree to pay back half of the total lunch bill. If you took out your Euros that day at the exchange rate of €0.8278 at that day’s rate, that €50 in USD is $60.40. So your friend owes you $30.20.

When your lunch buddy pays you back in Euros, which comes out to €25, great! Since you withdrew the €50 at €0.8278, do not deposit the €25 back into your USD account because the reconversion rate will apply.  Your €25 is no longer $30.20, but will now be $28.73 when it lands back into your USD account.

Since I get paid in USD and most of my expenses are in Euros, I follow the individual rate on a daily basis. I personally never deposit Euros back to my account since I will be losing money on the reconversion rate. When I am out shopping and about to make a large purchase, I will go online and check what that day’s rate is to ensure that I stay within budget, which is based on my USD bank account.      

If you’d like to stay updated on the value of your money in Europe, make sure to sign up for our daily Euro Rate newsletter.  You can also check on exchange rates around the world here. These rates are updated daily after 4 pm CET, at the end of the European Union monetary trading day.