Exchange rates aren’t just for holidays. Have you ever wondered how the exchange rate affects freight?
No, we thought not!
It’s a pretty complex system, and the rate changes daily, so we’ll leave to ins and outs to the experts. But exchange rates DO impact freight rates, along with a load of other factors, and it’s important to be able to identify different elements of freight rates to minimise costly overcharges and get the best deal out there
In this blog, we’ve done our best to give you an overview of what exchange rates are, how they get decided and what it means for your shipments.
What Are Exchange Rates?
We’re willing to bet you’ve paid close attention to the exchange rate in the weeks running up to a holiday, eagerly waiting until you can get the most bang for your buck. Those fluctuations in exchange value, where the British pound is worth slightly more or less in your visiting country’s currency, are caused by changes in the exchange rate.
If you’ve got no idea what we’re talking about, let’s look at a definition…
An exchange rate is a rate at which one currency can be exchanged for another. Exchange rates tell us what £1 (or another unit of currency) is equal to in foreign currency, so if you want to convert money from one currency to another, you’ll use these exchange rates to do the maths.
Who Decides The Exchange Rate?
The exchange rate changes all the time. We’re increasingly hearing more about it in this country because the Great British Pound is weaker than it has been in years gone by, thanks to inflation and interest rates.
Ever wondered where exchange rates come from? What are the numbers based on? And who thinks them up?
Is it the government?
The answer is yes and no.
There are two main types of exchange rates, and it’s up to individual countries to decide which model they follow.
Free Floating Exchange Rate
The foreign exchange market, or forex, operates 24 hours a day for 5.5 days a week and sets the rates for nations taking part in floating exchange rate schemes. This model is the one you might be more familiar with. It’s currently used by the US, UK, Japan and Europe.
Countries using a floating exchange rate enable the value of their currency to change in response to events, supply and demand in the market. The regime means that the currency price of a nation is relative to other currencies. And whilst it’s not set by the government, it can and is affected by their actions and policies.
Fixed Exchange Rate
This type of exchange rate is used by many Middle Eastern countries, as well as Panama, Cuba and Hong Kong. And this regime is government controlled.
Otherwise known as a pegged exchange rate, a fixed rate means a nation’s currency value is pegged by a monetary authority – the government or administration of the nation – against the worth of another currency. The most prevalent fixed exchange rates are pegged to the US dollar, meaning the currency values of nations following the scheme change in response to the fluctuations of the dollar.
How Does The Exchange Rate Affect Freight?
Explaining what exchange rates are and how they work is one thing. But how exactly does the exchange rate affect goods set to travel across the globe?
Well, because behind lots of freight shipments sits several international payments. And that means carriers have to navigate and account for currency changes as your shipment travels to or through different countries.
From the salaries of crew workers to packing supplies, docking fees and fuel costs, there is a long list of expenditures at play when moving a consignment from A to B, and they tend to be settled at different points before and after the journey.
For the most part, the shipping industry operates in US dollars. But it’s not a rule, and not every client, customer or carrier wants to be invoiced in USD. Typically, therefore, a global carrier will need to make multiple payments in different currencies to pay for the costs brought about by their fleet of vessels travelling all over the globe.
The problem with this is that exchange rates fluctuate, and the value of different currencies changes. And no one wants to lose money, do they? So, how can freight carriers account for currency changes mid-journey?
Most carriers use the Currency Adjustment Factor (CAF) method, where a surcharge is added to the invoice to account for changes in the exchange rate. Carriers impose a CAF when exporters and importers want to be billed in their local currency or when there will be charges for services at the origin or destination which are paid in local currencies.
Different carriers charge different percentage charges of CAF depending on the trade lane and currency pairing. An unstable market or a particularly volatile currency in the mix might mean that a carrier charges a high CAF, but most charge between 1% to 10% of the freight rates.
Changes In Exchange Rates Directly Impact Freight Rates
Depending on the countries your goods visit on their journey and the invoices that need to be met along the way, you’ll need to have a solid understanding of the exchange rates of different countries.
The bad news? Exchange rates change on a daily, if not hourly basis. It’s complicated and it’s time-consuming to keep track of.
Don’t have time to monitor the changes? Prefer to worry about how many euros or dollars you can get for your next holiday spends? Leave the freight exchange maths to us and contact Millenium today.