How Do Exchange Rates Work?

Exchange rates are one of those things in life which we have all heard of and used, but not many of us have ever wondered what the purpose of it is and why we pay exchange rates. An exchange rate is the cost of converting one type of currency into another. Simply put, you are ‘buying’ another currency when you go to exchange at the store.

For example, if you were to go and exchange your own money for money with another country, you will have to pay whatever the difference is to get your money. If the exchange rate between USD and GBP is 1.34/1, then you will have to pay $1.34 in order to buy £1. You can usually find the live exchange rates online, and you can even invest in the exchange rates with a site such as http://trustedforexbroker.com/ if you feel confident that the rate will stay high for a long time.

Most of the time when you look online at the exchange rate and then go to the store to exchange your currency, you will have to pay more at the store than the rate online. This is just because the trader wants to make a profit, so they will put up the price a small amount to gain a little profit out of your exchange.

Why Do They Change?

The main question people have about exchange rates is why they change. The simplest answer to that is that the value of a country changes. It might be for political reasons, it could be due to inflation, or simply the state of their economy. Take the UK for example. The US has always paid around $1.7 per British pound, it has been like this for a long time. However, earlier this year the UK voted themselves out of the EU. European countries cut trade ties with the UK and the world wasn’t happy with the decision. Because of this the value of the British pound dropped. To this day the exchange rate is around $1.35 per pound.

It can be the smallest of changes that make a huge impact on the way the world looks at exchange rates and how they value a country. It is rather similar to the stock market in that the value of a company goes up if they are successful and down if they are failing or a scandal has occurred.

When To Buy

Because exchange rates will change by the hour, it can be difficult to pinpoint when the best time is to exchange currency and buy your foreign cash. However, you can sometimes see a trend forming over a few weeks- and you want to catch the trend when it is low so that you don’t have to pay out as much of your for the cash. You can see the trends live here: http://www.xe.com/. Always keep you eyes out and you will be able to bag the best deal you can for your trip or holiday away.