Exchange Rates – Money Makes the World Go Round

If you've travelled from the UK to America or from America to Japan, you will have experienced exchange rates. Exchanging dollars for yen or pounds to dollars is an everyday occurrence for tourists and businesses alike. But not everybody understands why the financial reports state the pound is stronger than the dollar or that the dollar fell against the yen today. Exchange rates continually fluctuate and impact on the value of your currency.

So what are the factors that can influence the value of your money in different countries

Exchange rates - Money costs

Exchange rates are important because one country's currency isn't usually accepted in another country, so we need to exchange currency to conduct business. Buying currency however isn't as straightforward as you might think. Exchange rates mean that the value of your money can fluctuate.

Exchange rates and market forces

Exchange rates originally were backed by gold – currencies were valued literally by their worth in gold. For example in 1930 $35 equalled one ounce of gold. But the value of the US dollar dropped – it suffered from inflation – and so the one ounce of gold became worth $70. By 1971, exchange rates weren't based on gold at all, but on market forces.

Exchange rates are today still dominated by the US dollars however – a handful of strong currencies are used to express exchange rates including:

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  The US dollar


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  The Euro


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  The British pound


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  Canadian dollars


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  Australian dollars


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  Japanese yen

These currencies account for 80% of currency exchanges.

Exchange rates are determined by what is termed, floating currency. A floating exchange rate basically means a currency is worth whatever buyers will pay for it. Market forces – supply and demand – therefore dictate the exchange rates. Exchange rates are therefore influenced by:

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  Import and export ratios


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  Inflation


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  Foreign investment


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  Other economic influences

Floating exchange rates work for stable markets such as America and Britain, but investors can fall victim to swings in exchange rates and inflation. Governments who use floating exchange rates can also influence exchange rates with their economic policy using tax cuts, import tariffs and other factors that will change the value of a nation's currency.

If you are thinking of exchanging currencies, using a commercial currency broker can be the best way to get the most out of your money.

Foreign Currency Exchange Ltd is a commercial currency brokerage based in the UK. We help thousands of clients move hundreds of million pounds across the globe every day. From large businesses to private individuals who wish to send regular payments abroad, you can save money with us by getting better currency exchange rates than with your bank. The Foreign Currency Exchange buys currency at wholesale rates and can help you save money with our fast secure service. For more information contact us now, telephone +44 (0) 20 7989 0000 or email info@fcexchange.co.uk