Foreign Exchange Rates – The Basics

Foreign exchange rates can seem confusing, so we’ll walk through the basics of why they exist and how they work.  This way you can benefit from this information. There are entire college courses covering exchange rates, but for the common person, there are some high-level issues worth understanding.

What Creates Foreign Exchange Rates?
An exchange rate is a way to measure the strength of one country or region’s currency versus another. This is an important way that the market and investors value the safety and strength of a currency. In some cases, investors and countries hold their excess reserves in a strong currency like the US Dollar. As some countries have become more successful, their currencies have improved over the older western currencies.

How and Why Do Rates Move?
Exchange rates can move for any number of reasons. Sometimes it has to do with a major economic report, while other times it may have to do with a political decision. Election results can move a currency too. During the 2008 – 2009 financial crisis, exchange rates were fluctuating wildly. These daily moves usually matter more to currency traders than typical citizens, but there are some key lessons to learn for everyone.

How Do I Get Today’s Rates?
There are dozens of free websites that easily convert rates between different currencies. There are also free apps you can install on a smartphone.

Why Do Foreign Exchange Rates Matter to Me?
For the typical Brit, the most likely encounter with foreign exchange rates would be when travelling abroad. Since most of Europe uses the euro while the UK remained with the British pound, there is always an exchange rate between the two areas. When travelling to Europe for either a job or vacation, there may arise a need to convert your pounds to euros. That’s when it’s important to know about exchange rates and what they mean. There are a few issues to consider. If the Pound is considered “strong”, it may be a good time to travel to Europe since your money will go further. Additionally, you may be able to hedge your own money by buying many euros when they’re “cheap” if you intend on travelling there in the future.

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Darwin is an engineer and MBA who takes an "evolutionary" approach to finance, writing about adapting to evolving financial management, tax, investing, and savings opportunities. Making more money and saving more money is an adaptive process - join the evolution! He blogs at Darwin's Money and ETF Base.
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