Moving overseas and exchanging money
The other day, a reader asked me what economic signs I looked for to help me decide when it’s a good time to convert money from my home currency (US dollars) into the local currency.
Here is what I use to decide if it’s time to convert my money, or if I should wait a while.
Historical exchange rate
The first thing I look at is the traditional range of exchange rates between dollars and the local currency. One place where you can find this information is http://www.oanda.com/currency/historical-rates/.
Governments generally like to keep the rate within a certain range, so they can manage their imports, exports, and repaying debt to other countries.
As an example, let’s look at the exchange rate between the US dollar and the Euro. Right now, one Euro will get you 1.36 dollars. The highest that the Euro has been in the last 5 years is around 1.58 dollars, and the lowest is about 1.20 dollars.
When the Euro was at its highest, anything exported to the US suddenly became more expensive (in dollars), which causes Euro-based exports to drop. Then the politicians started to hear about how the people who make exportable items were going to go out of business and need to fire employees. So, the government intervened and lowers the exchange rate a bit (we’ll get to how they do that towards the end of this article).
What’s the price of gold?
Another factor behind the exchange rate is how much confidence people have in the future of a currency. When people don’t have faith in a currency, they often try to convert it to something they think will hold its value. For many people, that’s gold.
Gold doesn’t go up the same amount against every currency. For instance, the other day it increased around $30 an ounce, if you were buying it with US dollars. However, if you were buying it with Swiss Francs, the price of gold actually dropped. That means that (overall) people who had dollars would rather have gold, but people who had gold would (in general) prefer to have Swiss Francs.
You can use this information to get the overall opinion of a currency. If you start to see trends, like the price of gold constantly increasing in dollars, it may be a sign that you need to get your money out of dollars.
How governments and central banks manipulate the exchange rate
Another way to affect the exchange rate is with supply and demand. If more people want a particular currency, then it will become more expensive to change your money into that currency.
One way governments manage this by increasing or decreasing the amount of interest they pay on the bonds they issue. In the United States, you want to keep an eye on the interest paid on Treasury bills (T-Bills). But this is a trailing indicator – it only tells you what has been happening.
If the Treasury department increases the interest they pay on a T-Bill, it’s because they can’t “sell” any at a lower interest rate, because people don’t have as much faith in the future of the dollar.
How does this tell you when to exchange money?
All of the things above can change for many reasons. So I don’t have any rules that are set in stone. I just use these pieces of information to come up with a “gut feeling” of whether the exchange rate is likely to improve in my favor or not
If I think I’ll be able to get a better rate in the near future, then I’ll only exchange a small amount of money, so I can pay my current bills. If I think things are going to get worse, I’ll exchange as much as I can.
You also need to keep an eye on other actions that governments and central banks may take. When the US went through its recent budget crisis, people got nervous about the dollar and it hurt the exchange rate. If the government says they’re going to print up billions of dollars for another bailout or Quantitative Easing, that’s almost certainly going to hurt the exchange rate too.
After moving overseas, if you still have much of your money in your home currency, you need to pay attention to what is happening back home. Exchanging your money at the right time can let you lead a more enjoyable life.
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