For example, let’s say that you intend to exchange £100,000 into euros, to buy a villa on Spain’s Costa del Sol. You look at the pound to euro exchange rate one day, and it’s 1.10, meaning you’d get €110,000.
Then, you look at the exchange rate a week later, and it’s risen to 1.120, meaning you’d now get €120,000 when you exchange currencies. In this case, a higher exchange rate is better, because it means you’ll get more euros for your villa.
Equally however, a lower exchange rate can sometimes be better, if you want to sell a currency.
For instance, let’s say that you’ve lived in your Costa del Sol villa for 5 years, and you decide to sell it for €100,000, then transfer the money to the UK. In this case, a lower pound to euro exchange rate would be better.
For example, if you sell your villa for €100,000, then transfer the money to the UK at an exchange rate of 1.20, that will buy you £83,333. However, if the pound weakens to 1.10 versus the euro, your €100,000 will buy you £90,380. Hence, a lower exchange rate can be good too.
What’s more, a higher exchange is usually better both for individuals, and countries too. This is because, when your nation’s currency is stronger, importing goods from abroad becomes cheaper.
For example, let’s say that the pound to euro exchange rate rises from 1.10 to 1.20, like in our first example. In this case, it becomes much cheaper for the UK to import German cars like Mercedes and BMWs, as well as Italian wines and cheeses.
In turn, these goods will then cost less in the supermarket. With this in mind, a higher exchange rate is better, because it lifts your country’s global purchasing power.
Yet on the other hand, a lower exchange rate can better, if you want to make your country’s exports cheaper abroad.
For instance, let’s say that sterling falls from 1.20 to parity against the euro, at 1.00. In this case, the pound’s –20% fall will mean that UK goods become –20% cheaper for Britain’s international customers, thereby driving up sales.
In turn, if the UK is selling more abroad, it will need to produce more, accelerating Britain’s economic growth, even though the exchange rate is lower. With this in mind, a lower exchange rate can better, if you want to sell more goods abroad.
With all this in mind, we can broadly say that a higher exchange rate is better when you’re buying, and a lower exchange rate better when you’re selling!
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