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If you are planning a great vacation to far away shores, the total price of your trip can vary quite a bit based on the foreign currency exchange rate at the time. It is a good idea to check the exchange rates well in advance, and look for projected future exchange rates as well. This will prevent unpleasant surprises that could keep you from enjoying that grand vacation!
Yahoo has an excellent currency converter with graphs that show the trends for each currency, located at finance.yahoo.com/currency. If you look at the graphs closely, you can see if the currency rises and falls at certain times of the year. This will help with planning your trip.
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What are Foreign Currency Exchange Rates?
Fxclub.com Tip: The simplest definition of foreign currency exchange rates is the rate at which one currency, such as U.S. dollars, can be traded for another. As these currency exchange rates fluctuate constantly, there is considerable opportunity to earn money from the differences - called "arbitrage."
There are online sites that show currency exchange rates in real time where traders, or travelers, can check exchange rates.
The market through which investors trade in foreign currencies is called the Forex market.
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Canadian Currency - A Conservative Option
If you want to play it safe, the closest currency exchange rate and culture to the U.S. is Canada.
The Canadian dollar is the seventh most traded currency in the world, and many banks keep Canadian dollars as a reserve currency.
Typically, the Canadian dollar tends to move in tandem to the U.S. dollar, but less dramatically. This makes it a more stable investment for those who are seeking to play in the currency markets - but don't want to gamble.
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What Affects Currency Exchange Rates?
FXClub.com Tip: Currency exchange rates fluctuate for many reasons. If a country experiences an increase in either speculative or transaction demand for its currency, the relative exchange rates will go up.
Good news such as the launch of a high profile space mission or new trade agreement will increase demand for a currency and positively impact its trading rate. On the other hand, negative news such as a terrorist attack or natural disaster can cause a currency to devalue.
Transaction demand is impacted also by the country GDP, key businesses and deals, and unemployment rates. Central banks usually accomodate speculative demand by adjusting interest rates.
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Dollars, Sense, and Euros
The closest currency to the U.S. dollar is the Euro; which is the new currency of the European Common Market. The Euro is the unified, single currency for the following European nations: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Slovenia and Spain. Europe and America tend to be very close in terms of currency exchange, but some arbitrage potential does exist as the Euro is still somewhat volatile when compared to the U.S. dollar. Given the stability of the European markets, there is some speculation that the Euro may even someday surpass the U.S. dollar and become the primary world reserve currency - the currency upon which all other currencies are measured. Today, the first reserve currency is the U.S. dollar, and the second is the Euro.
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What is the Difference Between Spot Rates and Forward Rates?
FXClub.com Tip: A currency exchange rate is often quoted as spot rates, and future or forward rates. What does this mean?
Spot rates are the rate of exchange at the moment, and fluctuate quite a bit over the course of a day.
In contrast, forward exchange rates are rates that are quoted today for delivery and payment on some specified date in the future. No currencies change hands on the date the contract is signed for forward exchange transactions.
A forward premium or discount is calculated using the interest rate differential between the two currencies being traded.
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Why are the British Not Part of the Euro?
One of the only European currencies that is not included as part of the Euro is the British Pound Sterling. Why did the UK decide to abstain from the European Common Market? This could be the subject of many lengthy case studies, but the bottom line is that the British currency is one of the oldest and most well-known currencies in the market today. It is one of the currencies used as a standard.
The British pound is now worth roughly 2 U.S. dollars, and is one of the benchmark currencies in the world today.
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How are Foreign Exchange Rates Determined?
FXClub.com Tip: The Forex market is a relatively new market, and just emerged when currencies became "floating" currencies against each other.
Determining foreign currency exchange rates is a course offered by many business schools - a complete description of this subject would take many volumes! In simple terms, foreign currency exchange rates are determined using purchase power parity between the two countries, or how much does a similar item cost in each currency? There are many factors influencing currency rates including political developements, central bank policies, trade patterns and speculators.
Interest rate parity is another factor, as is the level of exchange controls or protection each country has in place against unfair trade.
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