Changes in exchange rates are intrinsically linked to our day-to-day lives. It may not be obvious initially, but the indirect impact of exchange rate movements can affect everything from business liquidity to holiday money, from import costs to job security.
In this article, we look at how exchange rates work, provide an overview of the factors most likely to impact exchange rates, and delve into what consumers and businesses alike can do to ensure they are getting competitive exchange rates.
What are exchange rates?
Exchange rates essentially mean the amount in one currency that equals another amount in another currency at any particular point in time. In other words, it is the amount in a foreign currency you can purchase with one unit of another.
Exchange rates fluctuate constantly on international foreign exchange markets due to a number of external variables that affect the relative strength of each currency. For example, at the time of writing, 1 GBP was equal to 1.28 USD, whereas on the same day in 2021, it was equal to 1.39 USD.
Market fluctuations can significantly affect the amount you receive when making a currency exchange or an international money transfer – and it is never easy to say which way markets will go.
What factors can impact exchange rates?
Various factors can influence exchange rates, leading to fluctuations that may occur swiftly, gradually, or with high volatility.
It is difficult to pin down what most affects exchange rates, but central banks’ monetary policy is arguably key to their stability or volatility. Factors can include how they control interest rates, trade balances, and overall supply and demand issues.
Inflation also impacts exchange rates. High inflation can positively impact currency because interest rates are one of the central banks’ main tools to control it, making interest rate hikes more likely. A rise in interest rates encourages foreign investment, positively impacting a currency. However, when inflation gets too high, or there is a period of hyperinflation, it can indicate broader economic issues, which can negatively impact a currency.
Exchange rates can also change rapidly due to geopolitical upheaval or international economic and political activities. For example, in the four days after the UK’s vote to leave the European Union in June 2016, sterling depreciated by 11 per cent against the US dollar and eight per cent against the euro.
How to manage the effects of exchange rate changes
Choosing when to engage with the foreign exchange market can be difficult, as exchange rates have the potential to change from minute to minute. Although you can get an understanding of what might impact exchange rates by examining current events and economic indicators, it’s impossible to know how they will move beforehand. What you can do is take steps to manage your risk exposure.
Foreign exchange specialists have expert knowledge of the currency market and offer a range of tools and products to help you manage risk exposure effectively. They are also often able to offer more competitive rates than high street banks because of the large volumes they’re trading.
It’s important to remember that while the FX market is easily accessible through your bank and other fintechs, it is not often a core offering, so they cannot provide the comprehensive service or the currency tools of a specialist foreign exchange provider.
Here are some of the currency tools available:
Forward contract
Forward contracts* allow you to lock into an exchange rate for up to two years. This allows you to avoid being caught out by negative exchange rate movements when the time comes to settle your transaction.
Spot contract
This is the most common form of currency exchange product. Ideal if you have limited time, the trade is usually settled within two days, so you’re relatively protected against short-term market fluctuations.
Market order
If you can be flexible and are not too pressed for time, using a market order can help you automate your transaction if the rate reaches an optimal point.
Monitoring exchange rates over a period of time can help you understand what a good rate is for you. This insight can determine when you make your transaction or when you lock in the rate with a forward contract.
Exchange rates can rise or fall suddenly for many reasons, including:
- The release of fresh economic data, such as inflation data
- Central bank policies, such as interest rate decisions
- Movements in yields on bonds
- A piece of unexpected political news, or a general election
With Moneycorp, you have the support of a Relationship Manager to help you understand your options and mitigate the financial risks. If you don’t choose a specialist foreign exchange provider, you could miss out on access to expert knowledge and dedicated tools to help you navigate the often complex world of currency markets.
FAQs
How do exchange rate fluctuations affect my money?
The indirect effect of exchange rates on our everyday lives should not be underestimated. The performance of our domestic currency—good or bad—can have a major impact on the prices we pay for imported products such as food, cars, and electronic goods, the amount of foreign investment the economy attracts, and the amount of money we can spend when abroad.
If you’re planning on buying a holiday home in sunnier climes, investing in business or property overseas, or getting a job abroad, what you end up paying or earning can be dependent on exchange rate movements. Those fluctuations can also impact the value of an inheritance or for UK nationals who own assets, hold an estate or reside overseas.
It’s important to remember that if you are making an international money transfer, the potential volatility of exchange rates could alter the actual value of the amount being transferred or the value you receive in your home currency.
For example, in 2023, the GBP/EUR rate fluctuated between 1.1775 and 1.1135. If you were buying a property, the difference in price at these rates to buy or sell a €500,000 property would be more than £24,000, depending on the time of year.
Are there any implications of changes in exchange rates for businesses?
Exchange rates are key to a business’s bottom line, as any change in the exchange rate will affect the prices of imports and exports. With so many SMEs (small and medium-sized enterprises) operating within tight margins, fluctuation can be a dangerous thing and can significantly affect profit margins.
Telegraph Media Group International Money Transfers, provided by Moneycorp, can offer you guidance to determine a strategy for approaching your foreign exchange needs. Moneycorp presents its results clearly and precisely, helping you understand the alternatives and leveraging its expertise in a way that works best for you.
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Open an account today with Telegraph Media Group International Money Transfers to enjoy competitive exchange rates, plus no transfer fees.
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* A forward contract may require a deposit
All rates sourced from Bloomberg unless otherwise stated
The above article was created for Telegraph Financial Solutions, a member of The Telegraph Media Group. For more information on Telegraph Financial Solutions click here.
Be aware of currency risk. None of the information contained in this article constitutes, nor should be construed as financial advice. Moneycorp is a trading name of TTT Moneycorp Limited, which is authorised by the Financial Conduct Authority under the Payment Service Regulations 2017 (Reference number 308919) for the provision of payment services. All customer funds are safeguarded in segregated client bank accounts. Date of approval 03/05/2023.
Information correct at date of publication.
