How is the conversion rate figured?
 

Hi, I've been watching XE.com's conversion rates for the UK and Ireland...very depressing right now. I'm curious to know how the conversion rate is figured ($ to Euro/Pound). Does anyone know? I'm hoping that it will be better when we go in June. Yes, I know it's a minute thing but I'm still curious. Kathie

Hi G,

>I'm curious to know how the conversion rate is figured...<

It used to be that the gnomes of Zurich set exchange rates.

Now it is done on futures exchange markets.

((I))

Here's a little chart that might help you. You can make yourself a little cheatsheet by adding in your bank's conversion fees. You have the interbank rate on a particular day + your bank/VISA/Mastercard add ons. http://www.oanda.com/convert/cheatsheet ((b))

Sorry, Ira but I still don't understand. Do they base it on what they think the US economy will be doing tomorrow (figuring that tomorrow takes into account next week, etc)?

Budman, Thanks for the chart. I can figure most of the numbers and with the pound hovering at $1.99, it's really easy. Kathie

Gunny asked: "Do they base it on what they think the US economy will be doing tomorrow (figuring that tomorrow takes into account next week, etc)?"

That's exactly it. Well, how the US economy will be going in relation to other economies, which is why the rate of exchange against different currencies goes up or down at different rates.

"They" are the people who trade in currencies, either because they need them for transactions or because they want to speculate on how things will go.

Assuming you want pounds and euros for a trip to the UK and Ireland, you are now one of "they", and by buying now or deferring your purchase until later, you are joining the ranks of the speculators.

Hi G,

Consider it a large eBay auction with hundreds of thousands of people wanting to buy or sell currency all at the same time.

The exchange rate that you see could be the opening rate, the closing rate, the average for the day or any other figure that your CC company or bank might decide is appropriate (the differences are usually very small).

The important thing is that the exchange rate is set by many people moving large amounts of money around.

Chaos theory would be more appropriate than economic theory for what happens.

((I))

Conversion rates are based on a daily currency valuation. The value is set by money traders and banks. They set the value that they will do conversions at (wholesale). Secondary traders, add a point or two to that value (retail)and make trades at that higher figure. Note that there is a buy and sell figure above and below the retail daily value. Imagine that the bank rate is 2. The retail number could be buy for 1.95 and sell for 2.05. It will cost you 2.05 for that currency. If you try to sell that currency you will get 1.95 for it. The conversion value will also have a fee percentage added on. It can be as low as 1% or as much as 3%. If you use an ATM there will be a machine use charge. As a practical matter debit/check card rates are as low as you can possibly get.

Setting those exchange rates is a very complicated issue. And maybe it's just me, but it seems that in the past when the US stock market was going up, you could usually assume that the dollar was increasing in value compared to the pound and euro. But that simple rule of thumb no longer seems to be true. Lately the stock market keeps going up and up, while the dollar keeps going down and down. Just a simple observation.

US$ is freely floating against other major curremcies like £, € and Yen, and it's the market forces that determine what the rate is at any given time.
There are usually three forces at work in the market: fundamentals, sentiments, technical. Fundamentals are about economic reality - e.g. a currency with high interest rate (like £ at 5.25%) is more attractive to buyers than the one with low interest (like Yen at 0.50%), as you get more return for your investment. Sentiments are to do with what the market thinks. If traders feel that interest rate in UK is set to go higher (as inflation is rising), they will buy sterling and hence its rate goes up. Sentiments are also to do with political issues - e.g. current US difficulties in the Middle East are having a negative effect on $. Lastly, technical means analysing the charts. There are traders in the market who ignore fundamentals and purely look at how a curreny has performed in the past, and use it as an indicator for the future. Chartists believed for a long time that £ would not breach $2, so every time it neared that mark, they sold £, $2 becoming the resistance level. Now that £ has pushed above $2, it has now become the support level, and chartists (also called technical analysts) are now more likely to buy £ to prop it above $2 level.
So the rate of a currency is determined by a combination of economic fundamentals, what the market thinks will happen to it in the near future, and comparing current fluctuation with those of the past.

Hi Alec,

I repeat, "Chaos theory would be more appropriate than economic theory for what happens". :)

((I))

Thank you everyone. Now, I can only hope that the exchange rate will be better when we go in June. Kathie

So you are delaying your foreign exchange purchase in the hope that the rate will move in your favour? Welcome to the world of currency speculation.

Padraig -

So you are suggesting the OP to do his foreign exchange purchase now in the hope that the rate will move in his favour? Welcome to the world of currency speculation.

;)

I don't worry about the exchange rate fluctuation when I vacation. If my budget was that tight it would mean I better stay home and save up some more vacation money.