A Beginner's Guide to Exchange Rates
Every year, tens of thousands of people move their money across borders. There are people who own property abroad, expats receiving a pension after retiring to foreign climes or parents paying for their children to study at overseas schools and universities. Most of those will be making regular transfers while many more need to make one-off transactions to pay for a holiday, boat or piece of art.
That means it makes sense to get your head around exchange rates. Despite what you might think, it is really not that hard and, importantly, it can save you money. Here is what you need to know, starting at the beginning.
Q: What are foreign exchange rates, and what affects them?
A: Put simply, exchange rates are the value of one country's currency against another, and they can be affected by a number of factors - firstly, inflation rates. The higher these are compared with other countries, the lower the exchange rate tends to be. A higher inflation rate in Germany than, say, the UK means that German goods increase in price quicker than British goods. Therefore exports to the UK from Germany become less competitive and demand for German goods should fall, creating less demand for the euro. Traders on the FX markets often anticipate inflation, so if they expect inflation to rise they will tend to sell the currency.
Q: Do movements in interest rates affect the exchange rate?
A: The higher interest rates are relative to other countries, the more attractive it is to deposit money in Germany. The return from savings is better, and so the demand for euros increases.
As the markets brace themselves for rate cuts, the euro tends to tumble. This is not always the case, however, as a rise in interest rates can lead to a fall in the exchange rate if investors see the rise as a lack of faith in euro growth prospects and move their funds elsewhere.
Q: Any other influencing factors?
A: Things like government debt, the relative strength of other currencies and government intervention.
Q: How quickly can exchange rates change?
A: The rates may vary considerably from day to day. Subtle differences in the value of currencies can make a huge impact on the amount you end up dealing with when it comes to sending money overseas, and things can change over the course of just a few days.
It's worth bearing in mind that this kind of movement could mean that the costs of your purchase could be affected drastically.
Q: When might I need to exchange or transfer money?
A: You are probably familiar with changing money to go on holiday, but there are lots of other reasons people make currency transfers. You, or your son or daughter could be off to university overseas and you will need to send funds to a foreign bank account to help with living expenses or pay fees.
You could be emigrating and you need accounts set up in your new home. Maybe you are retiring abroad and need your pension paid every month into a new foreign account, or you are doing business abroad and need competitive rates to help your bottom line.
Q: Why not just go to my bank?
A: That is the mistake a lot of people make. Specialized currency exchange companies can help you transfer your money more quickly and at a better exchange rate. Plus, you get to benefit from excellent customer service. If you need help, experts are on hand to make sure everything is straightforward.
Article contributed by World First UK Limited