How does currency and global exchange work? Totally physical, right?

[fuzzybabybunny]

I'm trying to break this down to some very basic elements.

- the value of a currency changes due to the laws of supply and demand

- currency is a physical product, and the supply is limited but changeable. The demand and supply fluctuate, therefore the value changes

Fundamental Problem:

If you're in the USA and buy a good from China, you've only got USD, so you send it. But the seller of the Chinese good can't use USD - they live in China so they need CNY.

The Normal Solution:

Your physical, cold, hard, USD cash needs to get converted into physical CNY cash. The supply of physical cash/currency is limited, remember? The bank that does the conversion takes a commission (~3-4% of the amount sent), and swaps the USD cash for CNY cash based on the mid-rate exchange rate, and then sends the cash to the Chinese seller in CNY.

When I do an international wire, I have the option to send my cash as USD or send it as CNY. If I send it as USD the bank in CNY needs to convert that to CNY so they take the commission. If I send it as CNY my American bank needs to convert my USD to CNY before it gets sent to the Chinese bank, so the American bank gets the commission.

Banks around the world get routine deliveries of crates of cash in all different currencies and they have on hand massive stores of the physical cash to do international transactions with. The 4% they take as commission from the official exchange rate pays for the physical logistics of handling all this cash.

Does this sound about right?

In the past and present, the Chinese central bank has simply sat on and held onto the USD cash that it receives during these deliveries. This limits the supply of USD cash in circulation around the world, therefore increasing the value of USD in relation to CNY (since USD cash becomes scarcer), which helps China's exports.

Is this how currency actually works on the international stage?

 

[sandorski]

I think so. Most countries with their own Currency keep reserves of other Foreign Currencies. They used to use those reserves to affect the value of their own currency. Not sure if they still do that.

 

[fuzzybabybunny]

I thought that this was interesting - I decided to see the commission that my bank charges to send money to New Zealand.

Imagine that a New Zealand business billed me XYZ amount. I log into Chase and choose to send XYZ New Zealand dollars via international wire.

This requires Chase to deduct an amount of USD from my account that includes:

- the true conversion rate (the Mid-Rate on the spreadsheet)
- their commission

So it looks like their commission rate starts at 3.77% and ends at 2% for really high amounts.

If there was some magical service where you could convert your money at exactly the Mid-Rate (no commissions or fees to anybody), the "USD value lost to Chase" would be the amount of money you would save.

 

[John Connor]

Banks around the world get routine deliveries of crates of cash in all different currencies and they have on hand massive stores of the physical cash to do international transactions with. The 4% they take as commission from the official exchange rate pays for the physical logistics of handling all this cash.

I have a really good movie plot.

 

[John Connor]

I keep physical gold and silver along with Bitcoin. The USD WILL collapse. Not a matter of if but when.

 

[fuzzybabybunny]

I have a really good movie plot.

A couple of stoners stand outside an airport every day getting high and watching massive crates of cash getting delivered. Their cars get stolen with their cat still inside. The rest of the movie is devoted to their back-and-forth struggle between trying to get their cat back and going to White Castle for munchies.

 

[Mai72]

I keep physical gold and silver along with Bitcoin. The USD WILL collapse. Not a matter of if but when.

I don't think the USD will fully collapse in our lifetime. It's definitely going to go thru a very difficult period. It's coming. The 2008 collapse was just a prelude to something much bigger.

When you have huge segments of people on welfare, not working and getting freebies the system is bound to get weaker. 35% of Americans are on welfare. The richest country and almost half are on some type of government assistance. That's frekin scary.

 

[Mai72]

A little off topic.

I watched a video with Grant Cardone. He has a channel on YT called The Cardone Zone. He was calling his banks to see if he could take out $1m of his own money. They gave him such a hard time. He was told he'd have to wait a week to take it out. They were asking "why do you need the money?" Etc... It's his money. Why all the questions?

Did you know that the dollar you have in the bank is loaned out 9 times. That's crazy.

 

[Mai72]

When I taught ESL in South Korea I was sending home $4,000 won a month. Towards the end of my stay it was more. Average was $4k. This was 2011-13, so the dollar was still a bit weak from the 2008 financial collapse. Every week I was checking on the currency rate in America. A weaker dollar against a stronger won meant that I was getting more dollar! Normally, both were about the same. If I sent $2,000 won I got about $1900 USD. -$100 for fees and the difference in currency. It worked well.

This is also why I loved trading in USD for baht when I traveled to Thailand. The USD crushes the baht. You can live like a king on USD in SE Asia. You want to take advantage of this. Vacation in SE Asia for 2 months on USD. It's great.

 

[dullard]

Think of it in the bigger picture sense. To you, there was a single transaction from USD to whatever currency you are converting it into. But that isn't how the bank sees it. The bank sees many transactions in both directions.

Suppose in a day, a large bank has $1 million USD transactions into Euros and $1.1 million USD worth of transactions from Euros to USD. The net effect was a $0.1 million USD conversion from Euros to USD. The bank gets to take their commissions on $2.1 million USD worth of trades. But at the end of the day, the bank only has to physically change $0.1 million USD.

Very little currency exchange actually occurs compared to the total amount of trade.

And I'm fuzzy about how it works, but I would think that it is almost all electronic with physical crates changing hands being a rare incident. The central banks (and/or governments) tend to hold the actual currencies rather than the individual banks.

 

[John Connor]

A little off topic.

I watched a video with Grant Cardone. He has a channel on YT called The Cardone Zone. He was calling his banks to see if he could take out $1m of his own money. They gave him such a hard time. He was told he'd have to wait a week to take it out. They were asking "why do you need the money?" Etc... It's his money. Why all the questions?

Did you know that the dollar you have in the bank is loaned out 9 times. That's crazy.

God, now what do I do if I win the lotto? Put it all under my bed? LMAO!

 

[Yakk]

Banks exchange currencies via Forex, which was once reserved strictly for banks BTW to make slow, but steady profits. A tiny, miniscule portion may be converted to physical currency to serve the general population.

Did you know that the dollar you have in the bank is loaned out 9 times. That's crazy.

Crazy, and unsustainable. Same as a gym overbooking membership assuming not all their clients will ever all show up at the same time. Except for currency it can happen in a crisis as was demonstrated in Greece when people were rationed in the amount of physical currency they were allowed to withdraw even if it legitimately belonged to them.

 

[Blackjack200]

A little off topic.

I watched a video with Grant Cardone. He has a channel on YT called The Cardone Zone. He was calling his banks to see if he could take out $1m of his own money. They gave him such a hard time. He was told he'd have to wait a week to take it out. They were asking "why do you need the money?" Etc... It's his money. Why all the questions?

It's his money that's being held on deposit at a bank. If he wanted immediate access to it he could simply put it in a safety deposit box at the bank and there would be no questions. (This is theoretical, I believe most banks actually prohibit keeping cash in safety deposit boxes)

Large cash transactions require CTR reports, it's the law. That's why all the questions.

Did you know that the dollar you have in the bank is loaned out 9 times. That's crazy.

Why is that crazy? You realize that you're griping about the safest banking system the world has ever known, right? Go back to the early 20th century before the Fed and FDIC insurance and see how fun banking is.

 

[Blackjack200]

Crazy, and unsustainable. Same as a gym overbooking membership assuming not all their clients will ever all show up at the same time. Except for currency it can happen in a crisis as was demonstrated in Greece when people were rationed in the amount of physical currency they were allowed to withdraw even if it legitimately belonged to them.

No, it's not unsustainable. Why in the world would you think that. Depositors have shown complete faith in the banking system. That's why even in the most severe liquidity crunches, like in 2008, there was no run on the banks.

 

[fuzzybabybunny]

Think of it in the bigger picture sense. To you, there was a single transaction from USD to whatever currency you are converting it into. But that isn't how the bank sees it. The bank sees many transactions in both directions.

Suppose in a day, a large bank has $1 million USD transactions into Euros and $1.1 million USD worth of transactions from Euros to USD. The net effect was a $0.1 million USD conversion from Euros to USD. The bank gets to take their commissions on $2.1 million USD worth of trades. But at the end of the day, the bank only has to physically change $0.1 million USD.

Very little currency exchange actually occurs compared to the total amount of trade.

And I'm fuzzy about how it works, but I would think that it is almost all electronic with physical crates changing hands being a rare incident. The central banks (and/or governments) tend to hold the actual currencies rather than the individual banks.

Yeah, that makes sense. So it's a very profitable thing for banks - they might have $4 mil to exchange, so they charge commission on that $4 mil, but they actually exchange the difference, which could be small.

So the physical movement of cash is just from one country's central bank to another country's central bank? A smaller bank reports to the central bank its currency movements and portions of the hard cash sitting in the central bank is electronically marked as "owned" by that bank?

 

[PowerEngineer]

The USD WILL collapse. Not a matter of if but when.

Yes, and one day the sun will burn out. Also not a matter of if but when. Knowing the "when" is what counts.

Banks exchange currencies via Forex, which was once reserved strictly for banks BTW to make slow, but steady profits. A tiny, miniscule portion may be converted to physical currency to serve the general population.

True enough. The good news today is that individuals can more directly trade in currencies through online sites that offer better exchange rates. The one that I have used is "World First". I have made transfers to the UK and Australia and been satisfied with their service.

https://www.worldfirst.com/us/

OP may want to investigate this option if converting large dollar amounts into NZ dollars.

 

[fuzzybabybunny]

True enough. The good news today is that individuals can more directly trade in currencies through online sites that offer better exchange rates. The one that I have used is "World First". I have made transfers to the UK and Australia and been satisfied with their service.

https://www.worldfirst.com/us/

OP may want to investigate this option if converting large dollar amounts into NZ dollars.

World First is very interesting. Do you know how they are able to convert currency at rates so close to the Interbank rate? Their commission seems to be less than 2%, which is already the lowest that banks like Chase offer for transfers greater than $1 mil.

 

[PowerEngineer]

World First is very interesting. Do you know how they are able to convert currency at rates so close to the Interbank rate? Their commission seems to be less than 2%, which is already the lowest that banks like Chase offer for transfers greater than $1 mil.

My vague understanding is that their internet business of relatively small transactions by individuals ($500 minimum) is piggybacking on top of the underlying larger trading volumes they execute for international banks. They obviously get paid through a small difference between the exchange rate they offer (changing on a minute-by-minute basis) and the exchange rate they actually get. I haven't tried to figure out what that amounts to as a percentage, and frankly do not really care as the exchange rate is so much better than what I was offered by banks, credit cards, or Western Union.

Remember that there are other websites out there that provide similar services.

 

[TallBill]

Funny, I'm in international finance right now.