Exchange rates are constantly moving, based on the perceived value of one currency against another. British pounds to euros, for example. This can impact the amount you get from a currency exchange.
If you're an expat living and working abroad, understanding FX risks could help you save money.
Different types of FX risk can have an impact on your money.
One example is transaction risk. This is the chance you could end up paying more or receiving less than expected on a pre-agreed transaction.
Companies that do business internationally have to manage this risk on an ongoing basis.
It can affect individuals too if exchange rates move between the moment a transaction is agreed and the moment it’s settled.
Example:
Imagine you’re selling a property in Europe so you can use the money to buy one in the UK. You agree a price of EUR300,000 when the EUR/GBP exchange rate is 0.8. That would make the sale price equivalent to GBP240,000, as each EUR1,000 would be worth GBP800.
But if the EUR/GBP exchange rate had changed to 0.7 by the time the sale settled, it’d only be worth GBP210,000.
Other types of FX risks that impact businesses include:
While those risks are more of a concern for businesses, exchange rate moves can cost you money when making payments back home - whether that's a mortgage payment, international school fees or sending money.
Factors that influence exchange rates include:
Inflation and interest rates are related and both have an influence on exchange rates.
Some inflation can be good for an economy. But too much can have a negative effect if goods and services become less affordable.
Central banks look at inflation when setting interest rates. Low interest rates can encourage people to spend and borrow more rather than save, which can boost economic growth and cause inflation to rise. If inflation rises too quickly, central banks may increase interest rates to help slow it down.
Higher interest rates can attract more international investment. That means more money coming into a country and increased demand for its currency, making it stronger relative to other currencies.
How a country or territory trades with the rest of the world can impact its currency. Countries or territories that export more than they import typically have a stronger currency.
Market expectations also play a role in exchange rate movements.
Economic data, such as Gross Domestic Product (GDP) and unemployment rates can affect market expectations.
The economic and political stability of a country or region is another factor behind a currency’s relative strength or weakness.
Read more about what drives exchange rates.
There are steps you can take to help manage FX risks.
A multi-currency account lets you hold different currencies in one account.
Whether you're a seasoned expat, or you're living abroad for the first time, this could help you stay in control of your finances.
If eligible, you may be interested in becoming an HSBC Expat customer to help support your global banking needs and benefit from our FX services.
If you’re an HSBC Expat customer, you may also be eligible for an HSBC Global Money Account. You can hold up to 19 currencies, so you won’t need to convert money every time you spend. You’ll get access to our best foreign exchange rates and be able to send money between currencies quickly.
If you need to send money to family or friends living in your home country, you can use a Global Money Account to make transfers in over 50 currencies with no HSBC fees.
If you’re shopping, dining out or doing any other spending overseas, you may get the option to pay in your home currency. This is known as dynamic currency conversion (DCC), where the exchange rate is set by the retailer or their bank at the point of sale.
There may be extra fees to pay in your home currency. But it can be useful if you want to know exactly how much you’re paying in your home currency.
Paying in the local currency is typically cheaper as you save on fees and the exchange rate is set by Mastercard or Visa.
You should always have the option to pay in local currency or your home currency – no one should make this choice for you.
There are tools to help you manage FX risks. For example, limit orders let you set the rate you want to exchange money at and if that rate becomes available the exchange will happen automatically. This saves you needing to monitor exchange rates during that period.
A limit order can be useful if you have larger costs to cover, and you want to get a specific amount for your money. Limit orders do expire, but you should be able to place a new one if needed.
