Exchange rates are crucial to a country’s economy because they affect financial flows and trade between nations. There are several benefits to having a good exchange rate: a strong currency makes imports cheaper, and when imports are cheaper inflation goes down which lowers the cost of living. Exchange rates also affect you when sending money abroad. To save money you should always spend time looking for the provider with the best exchange rate for your currency pair. This guide will take you through what you need to know.
Exchange rates tell you the value of your money in a foreign currency. In other words, it is the price charged to purchase another currency. Foreign exchange traders determine the exchange rate for the majority of currencies. The market trades trillions of pounds per day.
Changes in exchange rates influence decisions of businesses, the government and individuals. Collectively, this affects inflation and economic activity.
When you are sending or buying currency, a higher rate is better because you get more currency for your money. When you are selling currency, a lower rate is better because the lower exchange rate will enable you to make a profit.
The currencies that are used most often, such as the American dollar, the British pound, the Japanese yen and the Canadian dollar use flexible exchange rates. In countries with flexible exchange rates, government policies may influence exchange rates over the long term, but they do not have the power to regulate exchange rates. However, a fixed exchange rate is used in countries where the government regulates the value and controls the rate. Countries with fixed exchange rates include Saudi Arabia, Denmark and Hong Kong.
Hedging is a word used in the investment community to describe lowering your risk or protecting you against loss on a trade. There are a number of tools you can use to hedge your risk in the currency transfer and foreign exchange market, these include the following:
Read our simple guide on how money transfers work to get a better understanding of forward contracts and limit orders.
Exchange rates are always changing and it’s impossible to determine the direction they will go. But as you have read, there are steps you can take to ensure you get the best rate available at that time. We pride ourselves on providing reliable information that will benefit the reader, don’t just take our word for it; go out and do the research for yourself, so you are confident about the transaction you are going to make when sending money abroad.