Exchange Rates

[fred the great]

Please move this if necessary.

I notice that in some cases the local Bangkok Bank quotes buying and selling exchange rates up to five decimal places and just wondered where and how the rates are set.

It is generally accepted I believe that the economy in the USA is much worse than the UK and yet over the past few months the Dollar has strengthened against Sterling, previously 2 Dollars to the Pound and now about 1.5. Many 3rd World currencies are tied in some way to the US Dollar, hence  they benefit when their economy is actually quite weak.

This suggests to me that the Dollar Exchange Rate is being manipulated and is not a true indication of the financial strength of each Country.

Do we have any Bankers on board who can keep a straight honest face when answering these questions? Why has the the Dollar/Pound rate weakened by so much? And where and how are the rates determined/agreed?

[border-rider]

I'm not a banker, so the following is only my idea of how it works:

My understanding is that exchange rates are set by the market, ie each currency finds its price by how much in demand it is.  That's affected by interest rates, and also by market sentiment.  In general, the lower interest rates are, the less attractive a currency is to hold so people sell it and the price drops.  Governments can affect that by buying/selling their own currency as the UK tried when it was trying to stay in the ERM

In the case of sterling, low interest rates mean a low pound, but there is also not great confidence in the future performance of the UK economy.  Hence a weak pound.  The dollar of course is in a similar situation, but the US is big and the dollar is a reserve currency so it tends to perform a bit better all other things being equal.

2 dollars to the pound was too high anyway; it made it very hard for UK companies to sell into dollar markets and there was areal disparity in buying power between the two countries.  1.5 isn't overly low on the scale of things, though 1.6-1.7 might be a more equitable level.

[Asterix, the former Gaul.]

Demand for dollars is boosted because so many things are priced and traded in that currency e.g. oil.  It is the global currency and consequently its behaviour depends on more than just the strength of the US economy.   

[fred the great]

I appreciate the comments above but they didn't answer my questions, where and how rates are changed.

The quoted rates in Thailand are changed twice  each day from the morning quotes. I think but I'm not sure that these rates are based upon International changes somewhere and the 2 to 5 quoted decimal numbers for many Countries are probably a result of  the US$ movement. But how does it move based on gold or oil or what?

Also I see different buying and selling rates for Bank notes, Travellers Cheques, Bills and DD's.

So the system works where ever it is but doesn't seem to be very consistent or accurate.

[border-rider]

I appreciate the comments above but they didn't answer my questions, where and how rates are changed.

The actual underlying rates are determined by the international money markets.  All these currencies float and are not set formally ie no-one sits down and decides.  It's just how it pans out.  Some countries do lock their currency to that of others - some are locked to the dollar and some to the euro.  The pound isn't.

Also I see different buying and selling rates for Bank notes, Travellers Cheques, Bills and DD's.

Ah, that's a slightly different thing.  Each organisation buying/selling currency on that basis will set its own rates based on the underlying exchange rate, with a little extra each way to help them make a profit on the deal.  What that little extra is is up to them.

[fred the great]

So far nobody has really answered the question. If there are three quotes per working day from the largest Bank in Thailand then somebody in their currency Dept. is basing those revisions on somewhere/something else.

I think that these could be based upon daily forward rates for a basket of major currencies perhaps i.e. based upon major deals to buy or sell the Dollar forward plus some adjustment for the credit rating of the Country involved.

It seems we don't have a Banker to explain it to us. Of course the respective Central Banks are probably dictating rates in each Country. I'll give Google a bash tomorrow

[Gruff]

So far nobody has really answered the question. If there are three quotes per working day from the largest Bank in Thailand then somebody in their currency Dept. is basing those revisions on somewhere/something else.

They'll be basing it on the raw market data, I assume. In the same way that stock traders subscribe to real time information from the major stock exchanges, currency traders will have access to real time information on the fluctuating "price" of major world currencies. The perceived value of each currency will rise and fall through the day as players buy and sell, swapping one currency for another. The exchanges will have software which control and monitor these trades and the price being paid at each instant, and will feed that data out onto worldwide subscribers monitors, in just the same way that Tesco share prices are tracked and broadcast.

Each bank's currency unit will watch values through the day, and adjust their prices according to their own policies on margin.

I'm (clearly) not a banker, and have no actual knowledge of the subject on which I'm spouting off, so I could be completely wrong... but, that's how I imagine it's all done. Isn't it?

[iakobski]

There is no "exchange" for currency where everyone goes to buy and sell their dollars or whatever. Currency is traded directly between banks, companies, even individuals if you want to. The vast majority will be traded interbank between the big investment banks. They will set the price they are willing to trade at based on supply and demand, with a small bid-offer spread which is their commission on the trade. Other than the commission, it's a zero-sum game so the price must stabilise (globally) to within the spread very quickly, otherwise you could buy from bank A and immediately sell to bank B at a profit - and a loss to the banks. (Look up "arbitrage"). All the smaller players have to follow or they would lose out.

The price can change at any time and the current price will be quoted as the spot price - normally the London price as 35% of trades are done in The City. Your bank in Thailand will set their rate based on the quoted spot rate, and their buy/sell spread covers not just their commission but also the risk that the spot price moves before the next time they publish their rate.

As for why the price changes, ie why a currency might be more or less in demand at a given moment, there are so many factors have a look at http://en.wikipedia.org/wiki/Foreign_exchange_market#Determinants_of_FX_Rates

[rae]

The real rate is moving all the time.  In normal times, prices to the general public are updated irregularly (so 3 times a day).  There will be enough fat in those prices to swallow small movements.  If movements were violent, they would update more often.  If you walked in with a significant sum (say $50K), they'd get a spot price for you.

[De Sisti]

Where's the best place to exchange £s to Euro ? (I haven't got the Euro sign on my keyboard).

[Gruff]

Where's the best place to exchange £s to Euro ?

There's a decent search tool here:

Cheap Travel Money: Get your foreign currency for less with the Travel Money Maximiser

Tap in how much you want to exchange, and it will provide a selection of the best current deals.

Even cheaper, if there's time before you travel, open a Nationwide FlexAccount and you can take money out of ATM's on arrival at virtually the interbank exchange rate, with no commision or fees. Mine has saved me a packet over the last 18 months.

[fred the great]

Apparently the Foreign Exchange Market sets around 80% of the daily money which is exchanged in either US$ or Euros. The other currencies just follow or are mostly tied to the Dollar.

Previously the US$ was tied to a set exchange rate and prior to that to gold.

As  I understand it the Market works almost automatically as it were.

Interestingly I checked that link given above and the best quoted rate for Sterling was as near as damn it the same as the Bangkok Bank.

An interesting subject which I  now understand better.

Cheers