The exchange rate is one of the most important factors to consider when sending or receiving international money transfers. The rate for money transfers differs from the official exchange rates, which is why there can be variations in the final amount when transferring money abroad (or receiving it domestically).
In this article, we aim to discuss one of the key aspects of international financial transactions—namely, the exchange rate for money transfers. If you plan to transfer money to or from abroad for any reason, we recommend reading this article from Hafez Exchange.
Understanding the Exchange Rate
The exchange rate for money transfers refers to the rate at which currency is converted from one country to another. This rate (also known as the remittance exchange rate) indicates how much of one country’s currency (e.g., Iranian Rial) can be exchanged for a specific amount of another country’s currency (e.g., US Dollar).
Please note that the exchange rate for money transfers differs from the official exchange rate. For example, if the official price of the US Dollar today is 560,000 Rials, the remittance exchange rate may differ from this number.
Factors Affecting the Exchange Rate for Money Transfers
The following factors can influence the exchange rate for money transfers:
- International Currency Rates: The exchange rate largely depends on the international currency conversion rates set by currency markets. In other words, the higher the value of the desired currency, the higher the exchange rate will be.
- Transfer Fees: Banks, financial institutions, and exchange services charge various fees for transferring money from one country to another, which can affect the final exchange rate.
- Supply and Demand: The supply and demand for specific currencies can impact the exchange rate. For example, if demand for a currency is high, its exchange rate will increase, and vice versa.
- Monetary Policies: A country’s monetary policies, such as interest rates, taxation levels, and currency controls, can affect the exchange rate.
- Market Volatility: Financial and economic market fluctuations can have a significant impact on the exchange rate.
Exchange Rate vs. Official Exchange Rate
The exchange rate for money transfers and the official exchange rate have fundamental differences.
The official exchange rate, also known as the interbank exchange rate, is set by governments or central banks. This rate (currency price) is typically used for large transactions between banks and for adjusting a country’s monetary and currency policies. The official exchange rate may be fixed (determined by the central bank) or floating (based on market transactions).
On the other hand, the exchange rate for money transfers is determined by financial institutions, banks, and exchange services for transferring money from one country to another. This rate usually includes additional costs such as transfer fees, currency conversion fees, and the exchange service’s profit, making it different from the official exchange rate.
The main differences between the exchange rate for money transfers and the official exchange rate are:
Also read: What is a remittance and how does it differ from money?
1. Purpose of Use
The official exchange rate is used for determining macroeconomic and financial policies and for large interbank transactions, while the exchange rate for money transfers is used for international financial transfers by individuals and businesses.
2. Transaction Size and Volume
The official exchange rate is generally set for large-scale and international transactions, whereas the exchange rate for money transfers is used for smaller and everyday transactions.
3. Costs and Commissions
The official exchange rate is a net rate and does not include conversion costs or additional commissions, while the exchange rate for money transfers typically includes extra fees for money transfer services.
4. Flexibility and Fluctuations
The official exchange rate may be fixed or have minimal fluctuations, whereas the exchange rate for money transfers can experience greater volatility and be affected by factors such as market conditions and additional costs.
Consider the following example:
Assume the official exchange rate is 560,000 rials per US dollar, meaning that at exchange offices, each US dollar is worth 560,000 Iranian rials. However, when you want to transfer money abroad, the exchange office may offer each dollar at 565,000 rials because, in addition to the official rate, the transfer rate will include transfer fees and the exchange office’s profit.
Since the only way to transfer US dollars abroad in Iran is by using exchange office services, and these offices charge between 2% to 5% of the transfer amount as profit (including various fees), the transfer rate usually differs by 2% to 5% from the official exchange rate.
These differences are important because they can significantly impact the final amount of money you receive or pay.
Strategies to Improve Transfer Rates
To improve your transfer rate and reduce the costs associated with international money transfers, you can use the following strategies:
Compare Rates
You can use comparison tools such as official exchange rate websites or visit the exchange office’s website to familiarize yourself with different transfer rates and their differences from the official exchange rate. This will help you estimate the transfer amount before making the transfer.
Performing these calculations yourself in advance can greatly assist in managing costs and improving the transfer rate.
Choose the Best Time
The best time for making a currency transfer is when the financial market experiences the least amount of volatility. Note that your money transfer is calculated based on the exchange rate on the day of receipt, not the day of sending. Therefore, if the dollar rate is 56,000 rials at the time of sending and 58,000 rials on the day of receipt, the recipient will receive the amount based on the 58,000 rials rate (which is less favorable than the amount transferred).
Using Cryptocurrencies
Today, cryptocurrencies have revolutionized financial markets. Using digital exchange services and transferring money in the form of cryptocurrency to the recipient’s wallet is one of the best methods for sending funds abroad. The speed of transfer with this method is very high, which reduces the impact of market fluctuations.
Choosing the Best Exchange
When transferring or receiving money internationally, it is advisable to select an exchange that completes the transaction in the shortest possible time and charges the lowest fees. The efficiency of the exchange is crucial to mitigate the negative effects of market fluctuations, and lower fees will also reduce the transfer rate.
Hafez Exchange is one of the top Iranian exchanges that can transfer any amount within 1 to 2 business days at the most reasonable fee rates.
Using Money Transfer Networks
Some money transfer networks, such as SWIFT, facilitate the quick transfer of foreign currency. You can also use international financial institutions like PayPal and Western Union. While these services are very fast and economical, they may involve significant hassle and lower security due to banking sanctions on Iran.
Managing Transfer Costs
Before initiating a transfer, do some research and gather information about the costs that impact the transfer rate. Be aware that some exchange offices may have hidden fees or that the tax rates for currency exchange in different countries may vary slightly.
Understanding all transfer costs is a suitable way to control and reduce the transfer rate.
Converting Money to the Destination Currency Before Sending
One interesting strategy to mitigate the impact of fluctuations and reduce currency transfer costs is to convert the money to the destination currency before sending it through the exchange office. For example, if you plan to transfer money in dollars, providing the dollar amount directly to the exchange office instead of the equivalent in rials can lower the transfer rate.
This is because, firstly, currency fluctuations will not affect the final amount of money transferred, and secondly, the exchange office will only charge for the service fee, not for currency conversion.
Impacts of Transfer Rates on Financial Markets
Transfer rates can have significant effects on financial and economic markets. These impacts include:
Liquidity and Capital Flow
Currency transfers and money movement from one country to another can increase the liquidity in financial markets and affect the capital flow between countries. As a result, exchange offices and financial institutions today offer competitive rates for currency transfers in an effort to attract international investments to these markets.
Currency Fluctuations
Be aware that changes in transfer rates can lead to short-term fluctuations in currency rates (especially if the transfer volumes are large), as they influence supply and demand in the market. This relationship is so direct that instability in transfer rates can lead to instability in financial markets and even threaten the stability of official currency rates.
Also read: The reasons for the rise in the price of the dollar
Inflationary Effects
An increase in transfer rates can lead to higher final prices for imported goods, thereby increasing inflation in a country. Many monetary policies are designed based on changes in transfer rates.
Impact on International Trade
Transfer rates affect the final cost of trade transactions for goods and can lead to significant changes in the volume and quality of trade for certain items. This has led financial institutions, exchange offices, and banks to offer competitive rates to attract merchants for larger collaborations.
Impact of Transfer Rates on Personal Lives
Many individuals rely on remittances from abroad to cover their living expenses. Naturally, fluctuations in transfer rates have a direct impact on the personal lives and income of this group of people.
Impact of Transfer Rates on Currency and Stock Markets
Transfer rates can lead to significant movements in the currency market, especially if there are notable changes in rates. Rate fluctuations may also cause various reactions in the stock markets, particularly for companies involved in international trade.
Impact of Transfer Rates on Foreign Investments
Naturally, a significant increase in transfer rates can lead to a decrease in foreign investments, as these rates directly affect profitability and market supply. Essentially, the lower the transfer rate, the more vibrant foreign investments become.
Impact of Transfer Rates on Market Psychology
Changes in transfer rates can affect market expectations and lead to shifts in the behavior of investors and traders. These changes can influence market psychology, creating either positive or negative sentiments among investors and traders.
Analyzing and forecasting transfer rates is a complex process that requires studying and examining various parameters. By acquiring knowledge in this field, based on historical data, economic models, and statistical methods, you can predict transfer rates to a significant extent. However, forecasting and analyzing transfer rates are particularly relevant for individuals who need to transfer large amounts or whose business relies on regular currency transfers to/from abroad.
To analyze and forecast transfer rates, you can use the following techniques:
Fundamental Analysis
Examine the economic, financial, and political factors affecting transfer rates, including:
- Interest rates
- Inflation
- Trade balance
- Government and central bank policies
Technical Analysis
Review historical price data and trading volumes, including:
- Price charts and patterns
- Various indicators, such as Moving Averages, Relative Strength Index (RSI), and MACD (Moving Average Convergence Divergence)
Econometric Models
Analyze the relationships between exchange rates and various factors using historical data and economic variables such as:
- Regression models
- ARIMA models
Utilizing Big Data and Machine Learning
Analyze large datasets and use machine learning algorithms to forecast and analyze transfer rates.
Identifying Psychological Factors and Market Expectations
Examine rumors, news, and unexpected events such as:
- Economic and political news
- Rumors and expectations
- External and geographic factors
Tracking Oil Price Changes, Global Financial Crises, and Geopolitical Tensions
Monitor:
- Oil prices
- Global financial crises
- Geopolitical tensions
Software and Analytical Tools
Use financial analysis software and platforms such as:
- MetaTrader
- Bloomberg Terminal
- Python
Also read: What services do exchange offices provide?
Frequently Asked Questions
What are the types of currency transfers?
Currency transfers coming from an external source into the country are called incoming transfers, while the amounts sent are referred to as outgoing transfers.
Does the method of transfer affect the transfer rate?
Yes, international banks and financial institutions charge very low fees, but in Iran, due to sanctions, there is no direct method other than exchange office services.
What does the cost of a transfer rate include?
Half of the transfer fee cost consists of taxes from the destination country, one-quarter is the exchange office’s profit, and one-quarter is the profit of the exchange office in the destination country.
Conclusion
In this article, we aimed to provide a comprehensive explanation of transfer rates. We hope that this information from Hafez Exchange has been useful to you.
