When planning a holiday, everyone wants to get the best value for money. We all know that biding our time and carrying out some research can help us to save on flights and accommodation. But, have you ever considered that putting just as much thought into buying your travel money could help you to get a lot more for your money?
For the most part, it’s incredibly difficult to guess exactly what the exchange rates will look like each day. However, if you make sure that you’re well-informed and are willing to wait for the right time to exchange your money, you could end up getting a better price.
To help you out and get the best deal possible, we’ve put together a guide that covers everything you need to know about exchange rates. We’ll start with the basics…
What is an exchange rate?
An exchange rate (also known as a “foreign exchange rate” or “forex rate”) is how much one currency is worth in terms of another. For example, the Great British pound’s (GBP) exchange rate will tell you how much £1 is worth in a foreign currency, and vice versa. So, if you see that the GBP to Euro exchange rate is 1.15, you will receive €1.15 for every £1 you choose to exchange.
The exchange rate is set by the foreign exchange market (also known as Forex, FX or currency market). It is basically a stock market where traders can buy, sell, and exchange currencies. It operates 24 hours a day, Monday to Friday, which is why exchange rates often seem to stand still over the weekend.
What is the current exchange rate?
Exchange rates are fluctuating all the time, often multiple times a day. You can find up to date information on your currency of choice on the internet.
However, this is likely to show you a different rate than what you can actually get on the high-street or online, as foreign exchange is not a ‘one rate fits all’ situation.
For example, you may be looking at the spot rate (also known as the interbank rate). This is only used by large financial institutions when trading significant amounts of foreign currency. Tourists and people like us cannot buy their travel money at this rate, as they exchange much smaller amounts; this is similar to how there are wholesale and retail prices for goods.
When it comes to understanding what this means for you in real terms, you can calculate how much your money is worth in almost any foreign currency today using our travel money service. (If you’re happy with the rate you’re given, you can order it online to be delivered to your local store).
When is the best time to exchange your money?
Many holidaymakers leave it until the last minute to exchange their cash, but this often means that they don’t get the best value for their money. In fact, buying your holiday money at the airport is usually the least cost-effective option. You pay a premium for the convenience, and are also waiting on the day’s exchange rates, whatever they might be.
Instead, you should save your time to get the best deal for your money. It’s incredibly difficult to guess whether exchange rates will go up or down from day to day. But, if you make an effort to check them every few days, you’ll be able to get a decent idea of what a good rate looks like.
During particularly turbulent times, they can change quite dramatically from one week to the next. So, if you’ve booked a holiday, you should monitor the exchange rates for a few months before you go. Better yet, consider downloading a smartphone app that will give you live updates and send you notifications if there are any changes.
What affects the exchange rates?
There are lots of factors that can affect exchange rates, which is why it’s impossible to predict when the rates will be at their best. The current rate is largely based on how healthy the trading relationship is between two countries. But, to give you some idea of what goes into deciding the exchange rates of currencies, here are some of the main reason.
- Political instability
If a country does not have a stable, functioning government then foreign investors will be wary of trading with that country. With less demand comes less value and the rates for that country’s currency would go down.
Typically, a country with a consistently low inflation rate will have a rising currency value. This is because its purchasing power will increase over time relative to other currencies. In contrast, countries with higher levels of inflation will usually see their currencies depreciate in comparison with their trading partners.
- Natural disasters
A bad storm, flood, earthquake or wildfire can do a huge amount to a nation’s currency. The main problem is loss of infrastructure, making productivity and trade difficult, if not impossible in key areas.
- Terms of trade
This is a measure of how competitive a nation is when it comes to trade with other countries. In the simplest of terms, it is the average price of a country’s exports divided by the average price of its imports. An increase in terms of trade shows a higher demand for a country’s exports, and this usually results in a strong currency.
Where should I buy my travel money?
You will usually find that exchange rates are better online than on the high street, and they’re guaranteed to beat those you’ll find at the airport.
Here at H&T, we consistently rank among the most competitive options out there when it comes to exchange rates. If you want to get the most foreign currency for your money, you can’t go wrong with our fair and transparent pricing.
As well as ordering in-store, we also have the option to order foreign currencies online. The travel money you’ve bought will then be delivered free of charge to your local store for collection. We’ve got over 250 branches nationwide, so finding us should be easy.
Euros and US dollars are available to be picked up the same day, and the 67 other currencies we offer can be collected in just 48 hours.
We also offer currency buy-back at a guaranteed price, which means you won’t be left out of pocket if you return home with some foreign currency left over.
Still confused? Check out our glossary of travel money terms below.
If you’re not sure what something means when researching foreign currency, you should find the answer right here. If you’d like to see any other definitions added to this list, please feel free to get in touch with us.
Some foreign-exchange providers will allow you to sell your leftover foreign currency back to them at a guaranteed rate. This is called buy-back.
- Buy rate
The buy rate shows how much you can sell left over foreign currency back to companies like us for. So, for example, if you had just returned from France, we would exchange your euros for pounds at the current buy rate.
Commission is simply a fee that foreign-exchange providers charge for exchanging currencies. This is added as either a flat fee, or a percentage of the amount you exchange.
- Cross rate
This is the rate you’re given if you make an exchange that doesn’t involve the local currency. For example, if you were in the UK and wanted to exchange US dollars for euros, we would exchange your currency from dollars to pounds, and then pounds to euros. Therefore, you would be given a cross-rate for this transaction.
- Fixed (pegged) exchange rates
A fixed exchange rate exists when a country’s government or central bank has decided to tie its official exchange rate to the value of another country’s currency, or to the price of gold. The purpose of this is to keep the value of a country’s currency within a narrow band. Typically, countries with developing economies will have fixed exchange rates, while most major industrialised nations have floating exchange rate systems.
- Floating exchange rates
Floating exchange rates — also known as fluctuating or flexible exchange rates — are allowed to rise and fall in response to shifts in the foreign exchange market. They are typically based on supply and demand compared to other currencies.
Most of the world’s major economies have floating currencies and exchange rates that are set by the foreign exchange market.
- Sell rate
This is the rate at which you will be sold foreign currencies. For example, if you were planning a holiday to the US, we would exchange your pounds for US dollars at the sell rate.
- Spot rate
The spot rate is known more formally as the interbank rate. It is the rate that banks are given when trading significant amounts of foreign currency and is not available for the general public.