Why would Itch pay the fees out of their own pocket to send you money, instead of paypal or Itch deducting those fees from the sent amount?
Also, maybe doublecheck on that 4.99. Is that a capping for a percentage or is that a flat fee?
As far as I remember, a paypal account does not need to convert currency, unless it is a currency it cannot handle at all. So if you get paid in dollars, there are now dollars on your paypal account. You only need to convert it, if you send it somewhere that cannot accept dollars.
Similar for paying. If you pay in dollars and paypal cannot retrieve the money from your connected accounts or balance in dollars, conversion needs to happen. Paypal will of course happily offer you the conversion, even if the connected account could do it. So better check on which end the conversion will have lower fees.