Understanding Exchange Rates

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understanding exchange rates

Why doesn’t one US dollar equal one British Pound?

Wow! It feels like we are in a college economics class. You don’t have to be a math professor to understand all this, but you also don’t have to know everything in order to successfully (and smartly) exchange money for your overseas trip.

Psssst! The exchange rate is meant to reflect the relative strengths of different economies. Because we have an increasing global economy, developments in one country affect other countries.

Most people don’t think about foreign exchange rates until they are traveling overseas and need to spend money in a different currency.  Exchange rates and foreign currency trading can be complicated and difficult for people to understand. We are here to make it easy for you.

The foreign exchange market (forex, FX, or currency market) is a global decentralized market for the trading of currencies. This is by far the largest market in the world and includes all aspects of buying, selling and exchanging currencies at current or determined prices.

What are Exchange Rates?

An exchange rate is the price of a country’s currency in terms of another currency. An exchange rate is either quoted as the domestic currency (directly) or the foreign currency (indirectly).  Simply put, you have what your money is worth and what the same amount is worth in their money.

For example: $1.00 U.S. is worth C$1.1050 Canadian dollars. So if you have $100 (US) in your pocket and you walk into Canada it is now worth $110.50. Meaning, you can buy $10.5o more stuff!

$100 (directly) = C$110.50 (indirectly)

If you don’t need you money right away you can save money by watching the understanding exchange ratesmarket.  You can find exchange rate projections in the business section of a national newspaper or online news sites such as:

Rule of thumb: The stronger the dollar the stronger your exchange rate will be. If the experts are predicting a stronger dollar in a few weeks you can wait. If they predict the dollar getting weaker as your departure day arrives, exchange your money sooner rather than later.

Exchange rates can be floating or fixed. Floating exchange rates means that the currency rates are determined by market force . This is what most major counties have. However, some countries have  fixed domestic currencies where they are tied to a widely accepted currency like the US dollar.

When you are ready to buy or sell your money for another country’s money, the exchange rate will be determined by the market that day. The bank or other institution you are working with be able to tell you what it is.

Related: Handy Travel Tips for Everyone

understanding exchage ratesThe Mighty U.S. Dollar

Most exchange rates use the US dollar as the base currency and other currencies as the counter currency. However, there are a few exceptions to this rule, such as the euro and Commonwealth currencies like the British pound, Australian dollar and New Zealand dollar.

How do you exchange money?

Your Bank

If you are planning a trip to another country and would like to take their currency with you (planning ahead is good!) start with your local bank. Some banks and credit unions will exchange currency for free (without a service fee) if you have an account with them. If they don’t offer money exchange you can investigate other local banks to see if they offer free exchanges.

TIP: Currency Exchange is not a big part of most local bank branch business, so they might not have the information on their website. Call them instead and ask about their service fees for conducting foreign money exchange. They will also want to know which country currency you would like (they might have a limited number of countries whose currency they deal with.)

Related: Hidden Fees While Traveling

Airport Currency Counters

International Airports have Currency Counters, but you will likely pay high fees to exchange your money there.  They are good in a pinch, but if you can it’s best to avoid their high price tag.

Online Currency Exchange

Because the exchange rate is an international entity and so is the Internet, it would make sense that you can exchange money online. What can’t you do online anymore?

Travelex.com is one of many websites where you can buy and sell currency online using a credit card. If you are buying currency you can have it shipped to you or pick it up at one of their many stores. If you have foreign money left over after your trip you can sell it online too!

Related: Traveling with an EMV “Chip” Credit Card

understanding exchange rates

Now what?

You have your flight booked, your reservations made, your foreign currency tucked away in a safe spot, your passport is on stand by. What else, what else? Oh yeah….

Travel Insurance. No matter where you go and what type of money you use to get there, be sure to cover all your bases with travel insurance so you know how you’ll get home if you have an emergency situation pop up! You don’t want to have to spend all of your hard earned (foreign) money on transportation home.

Don’t have a plan?…

GET A PLAN

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