Bitesize Basics - What Is The Exchange Rate & Why Does It Change Every Day?
We get lots of questions from our customers on a day-to-day basis, and one of the most common is to do with travel money. Foreign currency exchange is one of our most popular services and our rates are usually one of the cheapest, on the high street. But of course, as with any currency exchange, these rates change daily.
These changes in the cost of currency can be confusing if you don’t understand what the exchange rate is in the first place. In this Bitesize Basics blog, we’ll give you a short, simple explanation of what it’s all about. You may already know some of this, or you may just be beginning your journey in learning about exchange rates – we all have to start somewhere. Let’s begin!
What does ‘exchange rate’ actually mean?
We don’t often use the word ‘rate’ to mean ‘cost’. As it is a word with many other meanings, it can make things confusing. Basically, the exchange rate tells you how much your £s are worth in another currency.
Max lives in the UK but has family in Germany. He visits once a year and needs to buy some euros for his next trip. He has £100 to exchange for euros, but the amount he will get depends on the exchange rate.
On the day he visits, the exchange rate between GBP (Great British Pound - £) and EUR (Euro - €) is 1.14.
This means that on that day, £1 is worth the same as €1.14. Max could buy €114 with his £100 budget.
If Max had purchased his euros a week earlier, he could have got €123 for his £100 budget, because the exchange rate on that day was 1.23.
The exchange rate can go up or down, which has a big effect on the value of your money.
Why does the exchange rate change?
All world currencies; from the pound to the Turkish lira, to the US dollar – exist in their most basic form on the stock market. Currencies are bought and sold by investors, who make money by purchasing currencies when the exchange rates are low, and selling them for a profit when the rates rise.
The value of any currency depends on investors – if they think a currency might lose value in the near future then they will sell. If lots of investors decide to sell, then the price will go down and the rates will fall.
There are many reasons why investors might think the value of a currency will drop, but there is never a way to know for sure what is going to happen. Elections, issues with government, the current state of the economy, future uncertainty, trade with other countries and even natural disasters can all affect a country’s currency.
Why is travel money sold at different rates on the high street?
Here at H&T, our foreign currency rates beat many other high street providers, which means that you can get more for your money. Although there is only ever one official exchange rate between two currencies, businesses who buy and sell currency on the high street will set their own rate.
This is higher than the official exchange rate by a small amount, so that these businesses are able to make money and pay for their running costs. Each travel money provider will ‘add on’ a different amount, with some being much more expensive than others.
Foreign exchanges at airport terminals and international rail stations may be more expensive compared to high-street providers, so be prepared to possibly pay a little more if you leave it until the last minute. It’s usually cheaper if you get your travel money in advance and compare rates before you buy.