Foreign currency - what's the deal?

Pounds and eurosWhether you are travelling for business or pleasure, you will need to get your hands on some local currency if your destination is overseas. But getting the best deal on your travel money can be hard.

Not only do other currencies move up and down constantly against sterling, you also need to consider commission and charges.

Here, we explain how it works and where to get the best rates.

Why do currencies go up and down?
Like anything else that can be bought or sold, demand for a currency influences the price.

John Mullens at foreign exchange specialist Personal FX said: "The foreign exchange market is the largest and most liquid financial market in the world, trading a fraction under $4 trillion worth of currency a day.

"Prices are determined by supply and demand and can be affected by every geo-political factor on the planet. Typically, however, the health of an economy or economic area determines the strength of its currency."

Other factors that tend to influence prices include interest rate hikes or falls. Mullens said: "If a central bank such as the Bank of England is expected to raise interest rates, then that country's currency will strengthen, all other factors being equal.

"The reason is that higher interest rates will attract more investors to buy that currency and the increase in demand will lead to a reduced supply."

Why can I not get the same rate that I see in the newspaper or on the news?
The rates quoted in newspapers and on television may well be the rates at which banks can trade currencies in very large sums (of say £1 million or more). These are know as "interbank" rates.

If there is one single rate, it will also be the "mid-price". This differs from the rates you will see in a bank or travel money agency, which are the price they buy a specific currency at, or the "bid" price, and the price they sell it at, or the "offer" price.

The difference between the two is the "spread" and the difference between the "mid-price" and the "bid" or "offer" price is the profit being made by the bank or exchange service on the transaction.

How can I exchange my money?
There are a number of ways to change pounds into other currencies. However, the easiest ones - using your credit card, exchanging money at your bank or visiting a bureau de change in the airport, for example - will not get you the best rates.

This is not necessarily the end of the world if you are only changing a small amount, but if you need a large amount of foreign currency the best bet is to go to a specialist such as Personal FX or Moneycorp.

Not only will you get a better rate of exchange, you can also access services that may fit your individual requirements better than a straight currency exchange.

These include contracts, know as "forwards", that allow you to reduce the risk of exchange rate movements making a future transfer more expensive by fixing a price in advance (with a 10% deposit).

Such services are generally only worthwhile if you are exchanging a relatively large amount of cash.

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