How a dollar travels from Hamburg to Dhaka without anyone carrying a suitcase, why exchange rates move, and why foreign exchange has rules.
When the buyer in Hamburg pays Shirin, nobody flies to Dhaka with a suitcase full of dollars. The money moves as messages between banks, and it arrives in Taka at a price that changes every day.
In this lesson you'll see how money actually crosses borders, what an exchange rate is and why it moves, and why every country, including Bangladesh, keeps rules about foreign exchange.
Each country has its own currency: Taka in Bangladesh, euro in Germany, dollar in the USA. Most world trade is priced in a few strong currencies, above all the US dollar.
So a Bangladeshi importer usually needs dollars to pay, and a Bangladeshi exporter usually earns dollars. The bank sits in the middle, buying dollars from exporters and selling them to importers.
At an airport money exchange counter, travellers coming home sell their leftover dollars and travellers going abroad buy them. A bank's foreign exchange desk is that counter, only much bigger.
Banks keep accounts with each other across the world. A Bangladeshi bank, for example, may keep a dollar account with a bank in New York. Bankers call it a nostro account ("our account with you").
When the buyer's bank pays Shirin, it doesn't send cash. It sends a secure message, usually through the SWIFT network, and the dollars move from one account to another in the banks' books. Shirin's bank sees the dollars land in its nostro account, then pays Shirin, mostly in Taka (exporters may keep a share in a foreign currency account).
It is like sending money by mobile banking. No notes travel; one balance goes down, another goes up, and both sides get a message. Banks do the same thing between countries, through their accounts with each other.
The exchange rate is the price of one currency in another: how many Taka for one dollar.
Like the price of onions, it moves with supply and demand:
When more dollars are wanted than are available, the dollar gets dearer and the Taka gets weaker. Bangladesh Bank sets rules for this market and watches it closely.
When onions are short before Eid, the price jumps. When a big harvest arrives, it falls. The dollar behaves the same way: a busy import season can push it up; strong remittances before Eid can calm it.
When the Taka gets weaker (more Taka per dollar):
To protect themselves, traders can lock in a rate for a future date with a forward contract.
If your cousin in Dubai sends 100 dollars and the rate rises from 110 to 120 Taka, your family gets 1,000 Taka more. But the shopkeeper importing dates (the fruit) from Dubai now pays more, and so will you at the market.
Dollars are precious for a country like Bangladesh: they pay for fuel, food, medicine and machines. So the law, the Foreign Exchange Regulation Act 1947, lets Bangladesh Bank set rules on how foreign exchange is earned, spent and reported. The rules aim to:
That is why trade money flows through licensed AD bank branches, with forms such as EXP and IMP and reporting to Bangladesh Bank's online systems.
A family with one main earner keeps a careful household budget. It doesn't mean the family is unhappy; it means money is precious, so everyone knows what comes in and what goes out.
So far: trade money moves as messages between banks' accounts, not as cash in suitcases. The exchange rate is the price of a currency, moving with supply and demand; a weaker Taka helps exporters and remittance families but makes imports dearer. Because dollars are precious, Bangladesh Bank sets rules on how they come in and go out.
Next: the papers. Every step you've seen leaves a document behind, and some of those documents are worth millions.
Four quick questions. Nobody sees your answers but you.
Banks send payment messages (usually via SWIFT) and move balances between their accounts with each other, such as nostro accounts.
Exporters and remittance receivers get more Taka for each dollar. Importers and dollar borrowers need more Taka.
"Nostro" means "ours": it is a bank's own account, in foreign currency, kept with a bank abroad.
The rules protect the country's dollars and keep trade money honest. Learning about trade is exactly what this site is for!
Anonymous. It only adds one to a count, so we know who the lessons are helping. We never learn who you are.
Brain feeling full? Take a tea break.