Newsletter: March, 2011
The Vault, March 2011: Exchange rates exposed!
In this issue of The Vault, we look at global currencies, how exchange rates are set, and why it matters to you.
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Sing a song of currency
Learn how a traveling choir deals with exchange rates in this clip from a recent episode of Biz Kid$:http://www.youtube.com/watch?v=_zqQnNuNvQo
It’s all relative
Money used to be made of precious metals like gold and silver. After a few thousand years, people started using paper notes that represented gold held in vaults. This was called the “gold standard.” This system broke down after World War II. Today, currencies are backed by—well, by nothing, except people’s faith in them. Most transactions are digital, and exchange rates today are not set by authorities. They are set by markets. The only way to move an exchange rate is by buying or selling lots of a particular currency.
Buying and selling money
Money is valuable because it can buy stuff. If Americans want to buy stuff made in Japan, they have to buy Japanese yen to get it. That makes Japanese yen worth more than the dollar, because there’s more demand for the yen (supply and demand!). Currencies that are stable, like the U.S. dollar and the Euro, tend to be worth more than unstable currencies. You want to be able to buy the same amount of stuff tomorrow with the money you buy today.
The fabulous forex
Currencies are bought and sold on a market called the “foreign exchange market” or “forex.” The forex is the largest market in the world. Four TRILLION dollars in currency changes hands every single day. It’s such a big and complex market that nobody can predict which way exchange rates will go. Big-time traders like governments and ultra-rich investors can try to move rates by buying or selling lots of a currency at once.
So what?
If you go to a country where the currency is weak compared to your home currency, you can get more for your money.
For instance, if the British pound (£) is worth $1.50, how many dollars will you spend on a tuna sandwich that costs £5.00?
£5.00 x $1.50 = $7.50
Exchange rates are also important if you are buying or selling stuff abroad. Your products or services are relatively cheap in countries with stronger currencies than yours. China buys lots of U.S. dollars to keep their currency weak against the dollar, so their exported goods are less expensive in the U.S. It works the other way, too—strong currencies make exports more expensive and imports less expensive.
Get more money for your money
You have to buy local currency when you travel. The money changers have to make a profit. They buy your currency at a low rate and sell it back to you at a higher rate when you leave. But you can get better rates with a few tips:
  • Exchange bureaus in airports sometimes charge high rates. Research the exchange rate before you go.
  • Getting cash from ATM machines will usually give you the best rate, but watch out for fees and get as much money as you can at once.
  • Call your bank before you travel so they don’t freeze your card when you take out money in another country.
For more on getting exchange rates and traveling, visit this site: http://www.independenttraveler.com/resources/article.cfm?AID=44&category=8