Foreign Exchange Rates Explained

Exchange rates: A definition

In the simplest of terms, currency exchange rates represent the value of a nation’s money in terms of another nation’s. Determining this, is done by comparing said nations’ various economies, and these are effected by the following:

• Interest rates
• Government confidence
• Inflation

Fluctuating interest rates, high levels of inflation and an unstable government can all have drastic effects on a nation’s exchange rate with other countries. To understand how foreign exchange works, it’s important that you gain an understanding of this.

Firstly, you should look for both currencies (your currency and the one you want to convert to); online resources or a reputable financial newspaper will have the current conversion rates for you.

Secondly, you should look for the rate at which your money is converted. For example, if a British pound equals 0.8 euros that means that for every pound you trade you will get 0.8 euros (80 cents) back in return.

You are now in a position to determine the relationship between the currencies. Using the example above, the euro is stronger than the pound (as it is less than one unit). This gives you less purchasing power when using the euro.

Banks & ATMs

Before taking a trip abroad, you should convert some of your money. Airports and hotels often charge higher rates for conversions which means you get less money back. As a rule banks and ATMs have more favourable rates in comparison.

Beware of conversion surcharges though. Often, there is either a flat rate charge of a set amount or a percentage fee on the conversion transaction. If it’s a flat fee, you should look to convert as much money as you can and if it’s a percentage, convert only what you need or you will lose out financially.

Credit Card

Finally, remember to ask your credit card company if you can use your card in the country that you are travelling to. Often you’ll find that their fees are lower than those places who would offer you an exchange like a bank or a hotel.

Understanding exchange rates and the pitfalls surrounding them is important and you really need to know about these sorts of things if you are thinking of traveling. Understanding the value of things when you are abroad can be difficult so do keep these tips in mind when you do travel.


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