The Facts About FX

If you’ve only done business in the U.S. currency of “dollars,” then be prepared for a new education when you start doing business in another currency, such as the euro. When you’ve traveled outside of the U.S., then you likely had to exchange your greenbacks for whatever currency is used where you were traveling, and did that at a bank or currency exchange outlet located in airports and center cities. But, those were small potatoes compared to making a property purchase in hundreds of thousands of dollars where the rate of exchange can make a huge difference.

I find that generally Americans are a bit naive about currency exchange as a result of their lack of experience — the kind that Europeans had on a daily basis when traveling between countries, having to convert to France’s franc, Italy’s lira or England’s sterling, etc., etc. Prior to the advent of the Euro, the common currency of the E.U., they must have kept a wallet for each one of them and spent most of their times calculating the differences.

Known as the FX, the foreign exchange market “is a global decentralized market for the trading of currencies.” (Wikipedia.org) Understanding how the FX works is an education into itself and those who speculate in the profits made simply by converting currencies must be very well versed in order to be successful. It’s a risky game because the factors that contribute to the fluctuations in the rates, that take place in the milliseconds, vary greatly and are totally uncontrollable.

Banks and brokers make big money from exchanging currency. Banks will often charge a fee on each transaction as well as adding a “margin” or “spread” — the difference between the buy rate and sell rate. So, beware of a bank that claims to not charge a fee — you can bet they’re making up for that in the margin.

A single rate quoted is normally the “mid-market” rate — half-way between the sell rate and the buy rate. For example, if the EUR/USD rate is quoted at 1.50 ($1.50 to €1),  then the Banks will buy Euros from each other for slightly more than $1.50 and buy US Dollars for slightly less than $1.50.

For example;

    Mid-market rate         = 1.5000 USD/EUR
    Interbank buy EUR     = 1.5005 USD/EUR
    Interbank buy USD     = 1.4995 USD/EUR

The “wholesale” rates are only available to large financial institutions who conduct a high volume of FX transactions. As an individual customer buying the same currencies, you are more likely to get rates like these:

    Mid-market rate               = 1.5000 USD/EUR
    Customer can buy EUR     = 1.5400 USD/EUR
    Customer can buy USD     = 1.4600 USD/EUR

These are bank-to-bank transfers and the margin is higher for smaller transactions. The difference is what the bank profits and in this case, it’s a whopping 4%. That is not all that unusual for commercial banks, who aren’t as much in the business of currency exchange, but happily do it. Outlets in the airports and in tourist spots are likely even higher, up to 10%. A broker specializing in the trade will save you huge amounts of money as their margin is normally about 1%.

For small amounts when traveling, just getting cash from your home account using an ATM machine to extract cash in the new currency using a debit card is your best bet for reducing the rate of exchange. But there are normally limits to how much you can take in any one day…determined by your bank or the distributor.

For large amounts, such as when purchasing a property and many thousands of euros must be transferred from dollars or other currency. Just imagine, you’re purchasing a one-bedroom apartment in Paris and the cost is €500,000. Your bank transfers the funds and the spread is 3%, but they don’t tell you this — they just give you the rate: $1.10 = €1.00, therefore your €500,000 cost you €550,000!

If you were to work with any one of our brokers, who work with reselling their wholesale rate, and generally work with a spread of 1%, your rate of exchange would have been $1.08 = €1.00. Instead your transfer would have cost you $540,000. That’s a savings of $10,000, just by using a specialist instead of your commercial bank!

Making the transfer is easy. First you set up an account with a currency broker you like and trust (we recommend three in particular). Then, rather than instructing your bank to transfer the money from your account directly to your Notaire or your French bank account, you have your bank transfer the funds to your currency broker and then you instruct the broker to transfer it to your Notaire or your French bank account. It’s one step more, like changing planes to arrive at the same destination, but your ticket cost less because of the transfer! Let’s face it, there is no reason to spend your hard-earned money with the bank if the result is the same!

The brokers offer a wide range of additional services, too. There are “One-off payments,” “Regular payment plans” and “Rate Targeting” — as well as “Buy Forwards.” These are excellent ways of taking the risk out of the exchange, by locking in a rate when it suits you.

To learn more about currency exchange and the brokers we trust and recommend, and to ask them all the questions you might have, visit our Currency Exchange page and be sure to tell them that Adrian sent you.

A bientôt,

Adrian Leeds
The Adrian Leeds Group

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P.S. I’ll be in Los Angeles next week and available for personal two-hour consultations between February 20th and 24th. The cost is $330, but the fee applies toward our search services, so not a penny is lost! If you are thinking of making an investment in France, you are sure to find the time with me very valuable. To schedule your meeting with me, email me at [email protected]