Imagine the conversation: “I am going to a Greek island this summer – Crete or Santorini or Rhodes.” “You might need to take drachmas.”
Markets are on red alert about the finances of Greece, so holiday planning involves the contemplations of a currency trader.
Tourists would not really need the new drachma though, as no Greek would refuse the ‘hard currency’ euro. And there is no need to worry about the exchange rate. If anything, your readies in euros will be worth more when spending there.
During the 2008 financial crisis, when the pound lost its value against most currencies, the Brits saw their holiday spending power reduced dramatically.
This year, however, British holidaymakers are to travel the continent, to take advantage of the weak euro. A pound is now worth around 1.4 euro, having gained ground against the euro steadily over the past five years, from a low of €1.02 near-parity at the end of 2008.
You can even consider a tragicomic romp across Europe in the steps of Michael Lewis, the writer who visited Iceland, Ireland and Greece as a financial disaster tourist.
Those who want to lock in the current favourable pound to euro rate could buy their holiday euros in advance at home, although exchanging the pound at a local booth at your destination or simply getting it from a cash machine once you got there incurs lower fees than those charged on the UK high streets.
Credit or debit cards charge the exchange rates of the day when the card is actually used for purchase. Travellers can fix the FX rate by loading up a prepaid travel card with their holiday money now and use it later in the summer.
Trying to outsmart the currency market for a one or two thousand-euro holiday budget might only earn the price of one extra dinner, but when you are moving large sums, it can make a difference.
If you can secure just one eurocent more for each of your 100,000 pounds when buying a holiday home in sunny Italy, for example, you would have a thousand more euros to spend on your property.
Timing is crucial. Would-be buyers of European property keep asking the question: has the euro now reached the bottom against the pound? Is this the time to buy?
The financial crisis shook faith in the banking system, then the FX rate-rigging scandal pointed at the flawed currency exchange business of banks. It made a growing number of customers look for alternative options when converting money.
Expat bankers in London, however, are not using their very own high street banks when converting their bonuses, pulling in their funds from abroad or regrouping them between currencies, even if the money could move conveniently straight from their bank accounts to overseas. They use foreign exchange brokers, whose exchange rates are more competitive than that of banks.
Also, banks often charge a range of transaction fees that are challenging to find out ahead.
Pensioners who live abroad, parents paying the school fees for having their children educated abroad, those doing a significant foreign purchase, or small businesses doing regular transactions across borders can all save by getting good advice on when and where to exchange.
Western Union, the world’s largest provider of money-transfer services, is built on the remittances of migrant workers sending money back home to developing or poor countries. The advantage of the US company is the bricks-and-mortar shops that can take cash from customers without bank accounts, or the agents in Africa or the Caribbean from whom the recipients can pick up the cash.
The market for money-transfers has an influx of new entrants undercutting the rates and fees of banks, and even that of exchange brokers. If a customer is tech savvy, he can use the peer-to-peer platforms to beat the traditional system. These ‘fintech’ start-ups use the same principle as that used to raise money from crowdfunding.
They are often referred to as ‘disruptive technologies’ challenging the banks, similar to what happened in the telecom, travel or media sectors. TransferWise, for example, is dubbed ‘the Skype of money transfers’. That company revolutionised long-distance calling by offering free online video calls.
TransferWise was founded by a former Skype employee, with a business model based on the solution to his own situation: when he moved to London, he was still on the Estonian payroll of the virtual company, so he needed to transfer and exchange his earnings into pounds to cover his living expenses in the UK. When he met a fellow Estonian who had the same problem, but in the opposite direction – he was paid in sterling in London and had a mortgage to settle in Estonia – the two worked out an arrangement. Each month, one would transfer money from his Estonian account to the other’s Estonian account. In return, he would receive money to his UK account from the other’s UK account.
Rather than crossing borders, the transfers were made within the same country, so no international transaction fees occurred. Also, they used the mid-market exchange rate, outsmarting the exchange margins of the banks.
The internet company they set up pairs users: if someone in the UK wants to transfer money to Spain, he transfers pounds to TransferWise’s UK account. The algorithm then links this to someone in Spain who wants to convert his money to pounds, and deposits euros in the firm’s Spanish account.
The problematic currencies are those of countries that have fewer immigrants than émigrés, such as India. The demand for exchanging pounds into Indian rupees is higher than the demand the other way.
Also, critics are questioning whether start-ups can comply with the stringent anti-money laundering laws and ‘know-your-customer’ rules some banks are all struggling with.
Others invest abroad in search of a higher return. That, however, brings in the underlying – and often underappreciated – currency risk. A British investor can buy into the higher yields of the Italian market, but once you factor in the potential loss in the value of the euro against the pound, the extra return is often wiped out.
The more daring investors try to play the currency game directly.
It is speculation. In currency markets, there is a lot of volatility. The investor consults analyses about the latest market developments, the forecasts, the views of the financial adviser, and then, in the end, he makes his own best guess about when to buy the currency.
Carry trades – borrowing money in a currency where interest rates are low and investing the money in a currency or a country where interest rates are higher – might seem to be no-brainers, but financial history chronicles some spectacular investment losses on this.
For Britons, the best-known currency speculator is George Soros, “the man who broke the Bank of England” on ‘Black Wednesday’ in 1992, when Britain had to leave the European Exchange Rate Mechanism.
Getting into the eurozone was not a success story for Britain, and now it is the uncertainty around the referendum on leaving the EU that promises to upset the currency markets.
Maria Sovago is a freelance journalist
Key points
Holiday planning to Greece involves the contemplations of a currency trader.
The market for money-transfer has an influx of new entrants undercutting the rates and fees of banks.
TransferWise was founded by a former Skype employee as a simpler way of doing currency exchange.