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Understanding foreign exchange

For most people, foreign exchange is a topic of conversation that comes up once or twice a year around holiday time from travellers seeking out the best rate for their next adventure.

Simply put, the exchange rate – also sometimes referred to as the FX rate – is the rate at which once currency can be exchanged for another. The greater the demand, the higher the value of one currency against another. Complex world economies mean foreign exchange rates fluctuate all the time – and by taking the time to understand how it works you can use this knowledge to strategically choose your next holiday destination and find a great deal in the process.

How it works

The value of a currency is affected by interest rates, inflation, strength of the local economy, and government debt, among other things. The higher a nation’s currency the more expensive its goods and services to people overseas will be. This has an impact on the economy, particularly when considering manufacturing, exporting and tourism because it pushes prices higher.  In contrast, when a nation’s currency is low, tourism becomes more affordable as a strong exchange rate makes it cheaper to convert your home currency and spend money in another country.

In the main, people change currencies for travelling or living in another country, however foreign exchange also often comes into consideration for making a major purchase in a specific country or seeking opportunities to invest in products using a different currency.

Where and when to get the best rate

Changing currency is a fairly straightforward process and can be done in a number of ways. If you’re changing a large sum of money or transferring your assets overseas ahead of a move it will be a slightly more complicated process; banks often charge fees for large transfers and there may even be tax incentives to do it slowly over time. The best way to go about doing this is through a financial advisor who is an expert in foreign exchange – they can help you navigate the transition and make sure you get the best possible rate.

Getting the best exchange rate requires a little forward planning. In the lead-up to your next holiday, it’s a good idea to periodically check global exchange rates to find the optimum time to change your money. Websites like XE display live exchange rates and will give you a rough idea of how much a unit of your local currency will be able to purchase. You can typically get foreign currency from your local bank or visit a specialist currency converter before you go. You can also exchange your money at the airport – but beware, as you often pay a much higher rate there than you would elsewhere.

One thing to bear in mind is hidden charges – some banks charge a fee for spending abroad on your debit card. In contrast, many credit cards will offer a fixed exchange rate so this might be a more affordable alternative if you’re withdrawing cash abroad.

Tools like Travel Money Max from Moneysavingexpert.com can help you quickly compare the best online rates ahead of your holiday – and then again on your way home if you want to sell back any outstanding currency that you didn’t use.

Disclaimer

The contents of this article are for reference purposes only and do not constitute financial or legal advice. Independent financial or legal advice should be sought in relation to any specific matter. Articles are published by us without any knowledge or notice of the circumstances in which you or anyone else may use or rely on articles or any copy of the information, guidance or documents obtained from articles. We operate and publish articles without undertaking or accepting any duty of care or responsibility for articles or their contents, services or facilities. You undertake to rely on them entirely at your own risk, and without recourse to us. No assurance of the quality of articles is given or undertaken (whether as to accuracy, completeness, fitness for any purpose, conformance to any description or sample, or otherwise), or as to the timeliness of the publication.

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