Friday, December 03, 2004


Our first forex trade completed; we have real money here now. We're still waiting for Visa/ATM cards on our bank account, but at least the cash is here.

And here's the deal with foreign exchange: you want to get as close to the interbank rate as possible. In rough order from worst to best, rates go as follows: tourist rate; high-street bank rates; foreign exchange dealer rate; interbank rate.

Tourist rates are poor but convenient if you want to take cash with you. High-street banks will happily do foreign wires or drafts, but the rate'll favour them rather than you (and they'll charge you a fee for the privilege also). You won't get interbank rate unless you're a financial institution. But using a dedicated forex dealer narrows gets you close: they make their money on the gap, but they work on volume and they're competitive with each other which keeps the gap narrow.

The effective rate for using UK credit or debit cards abroad depends on how much loading is applied over and above the interbank rate; if I remember rightly, Visa/Mastercard apply 1% and most issuers apply a further 2–3%. This puts them somewhere around the high-street bank rate — still much cheaper than paying tourist rates for changing money or travellers cheques. Some credit-card issuers issuers give better deals: for example Nationwide don't apply any extra loading over the Visa/Mastercard cut. This makes a Nationwide credit card a good bet for spending overseas.

But if you want a big lump of cash in local currency, forex is the way to go. A basic forex trade is a 3-step operation: you make the deal, which commits you to buying X dollars for Y pounds at an exchange rate of Z. You wire the forex dealer your pounds from your UK bank account. And they wire dollars to your US bank account. There's a certain leap of faith here: you're sending your money to the dealer and expecting to get it back, so you need to trust them. Getting recommendations helps. We'd seen a number of dealers mentioned in newspaper articles and recommended on Motley Fool discussion boards, and picked two: XEtrade, an online broker; and HIFX, a traditional broker based in Windsor. You can also ask for a reference from the brokers' bankers, although we didn't bother with this.

For the first trade, we went with XEtrade: it's more convenient placing trades on the web, and their rates were 1/10c cheaper. And I'm impressed. I placed the trade on Tuesday morning and BACS transferred the money from our UK account; they received it, and wired dollars to our US account, on Thursday; and the money arrived here on Friday. That's as fast as most transfers between accounts in the UK! Bravo.

(But of course the rates went better yet on Wednesday; oh well. It's hard calling the top, and I was happy with the rate we got. I might try a limit order next time, which lets you set a minimum rate to strike the deal at; but this time, we wanted cash now.)