From dollars, to euros, to pound sterling, if you’re travelling abroad you’ll need to exchange currencies. We explain what you need to know about foreign currency and exchange rates.
While a travel card is a viable way to spend money abroad, some people still enjoy the reliability of cash. Ultimately it could come in handy if you need to buy something in a local market, or if you need an urgent taxi while you’re on a business trip.
It’s often best getting your cash before you depart, which means you’ll need to use an exchange rate. Below we explain:
- What is an exchange rate
- Why do exchange rates change?
- How to compare exchange rates
- What do I need to transfer money abroad?
Read more: The best ways to transfer money internationally
What is an exchange rate?
At its core, an exchange rate is a number. This number is the price of one country’s currency against another’s – so there’s no such thing as a single exchange rate.
For example, in the UK the official currency is the pound sterling and in the US uses dollars. Now if the pound to dollar exchange rate was 1.20 this means every pound is worth $1.20.
If you flip this around, your exchange rate will fall below one. For instance if the dollar to pound exchange rate is 0.80 it means each dollar is worth 80p.
In some instances an exchange rate can reach “parity” where each currency is of equal value.
Naturally, currencies aren’t static and they change in value throughout the day. If you read a news story about a sudden rise in the value of the pound it doesn’t necessarily mean you’ll be going on a cheaper holiday. The exchange rate still needs to take into account the value of the currency the pound is measured against. And if that has strengthened by a greater extent in the same period then you’ll be paying more for your currency.
Read more: The best and cheapest travel money providers
Send money abroad with Xe
Whether it be buying a new holiday home in Spain, sending money back home to friends and family or paying international business invoices use Xe for all your money transfer needs. As well as getting access to Xe’s online platform, which is designed for speed, security, and simplicity, you can also use their dedicated managed service providing tailored solutions to meet your unique currency needs. With Xe, you’re not just a client; you’re a valued partner in a global financial journey.
Why do exchange rates change?
Unlike the stock market, where stock exchanges have an opening and closing time, currencies constantly fluctuate. Changes also happen in real time, which is why many foreign exchange brokers display electronic boards with live updates on the latest exchange rates.
These fluctuations are driven by supply and demand.
Demand refers to the amount of people, investors, and money used to buy a particular currency while the supply refers to the amount of money in circulation.
If large quantities of people chose to holiday in Europe this summer, it’d create demand for Euros but this will unlikely see an uptick in the value of its currency. Instead large trade deals and investment often determine changes in the exchange rate.
Read more: What is an IBAN?
What other factors could affect the exchange rate?
One of the responsibilities of a country’s central bank is to protect the value of its currency. While institutions like the Bank of England can’t directly control how exchange rates fluctuate, they do have a number of tools at their disposal to maintain the value of the pound. These, and broader economic events which can affect exchange rates are mentioned below.
Interest rates
In the UK, the Bank of England’s Monetary Policy Committee sets the “base rate” or “interest rates”. This is used to control inflation and keep it within the Government’s target.
If interest rates are rising it could strengthen the pound. This is because it can make UK bonds and other investable assets more appealing – boosting demand for investment and therefore the pound.
Read more: What do UK interest rate rises mean for you?
Inflation
Inflation can be defined as the rate at which prices rise over time. For example, if you used to be able to buy a loaf of bread at £1, and it now costs £1.10 then your buying power has reduced.
More expensive prices in the economy means it becomes less attractive for international trade. For example, if Europe can supply the same services as the UK but at a cheaper price then an American business might be tempted to switch. An outflow in investment reduces demand for that currency and makes it weaker.
Read more: How to calculate inflation to plan for the future
Trade
The relationship between a country’s imports and exports can impact the value of its currency. Countries that export large quantities of goods and services will typically be paid in their local currency.
This drives demand for their money and can increase the value of its currency.
Economic projections
A growing, healthy economy is a good sign for a foreign investor. This can drive demand for that country’s currency.
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How to compare exchange rates
Before you set off abroad it is a good idea to first get your finances in order. Buying money at the airport is often one of the most expensive places to switch currencies, so if you time your exchange before travelling you can save money.
The Times Money Mentor has partnered with XE*, a foreign exchange broker, to provide you with a currency conversion tool to track your exchange rates. Use their tool above to do your research and if you’re ready to lock in you can purchase your currency with XE.
What do I need to transfer money abroad?
Just like transferring money locally, you’ll need key information from your recipient when transferring money abroad.
In addition to their name, bank account, and number you may be required to provide an IBAN number or SWIFT code. Our guide explains.
FAQs
Should I buy currency with my debit or credit card?
If you use your credit card to buy foreign currency you may end up paying more for your money. Some credit card companies consider these purchases as a cash advance, which incurs an additional charge. Debit card transfers or bank wires don’t incur these fees.
How do I receive foreign cash?
Some brokers have the option to deliver your cash to you for a fee. This can also take a couple of days depending on your provider, so if you need cash urgently look for a local bureau de change in your area.
What do I do with leftover foreign currency?
This is up to you, you can keep it aside for a future trip abroad or you can change it back into pounds if you need the money. With some foreign exchange brokers you’ll be given a guaranteed buy back, which means when you come back to the UK your broker will convert your money back at a guaranteed exchange rate. The benefit of this is you’ll know exactly what money you’re getting, but it does come with a fee which may make it more expensive.
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