What Every Expat Should Understand About Foreign Currency

One of the biggest areas that many expatriates overlook is the effect that foreign currency exchange rates can have on the quality of their lives once they have moved overseas. Currency movements can make a big difference to your earnings potential, cost of living and the value of your savings and it is therefore critical that all expats understand exactly how the currency of the country within which they live has the ability to interact with that of their home country. In this article we take a look at some of the potential currency issues that expats need to be aware of when they move abroad.

If you are moving to a country that uses a different currency from that of your home country then there are some risks that you need to be aware of and you need to understand the importance of adequately balancing your income, assets and expenses across the different currencies. The more assets and savings accounts you have, the more difficult this can become.

Currency fluctuations

Currency fluctuations can literally change an expat’s life overnight. One only needs to consider all the concerns that are currently escalating with regards to the Euro in order to acknowledge just how significantly the value of a currency can impact an expat’s quality of life.

The value of a specific currency should be of particular concern to expatriates if they are paid in one currency but live in a country that uses another. If the base currency of their pay matches their home country then this is useful for saving money that can be used when they return home but if the value of their host country’s currency changes significantly while they are living overseas then they may suddenly find life very expensive and may begin to erode their savings in order to maintain a suitable quality of life. How can expatriates deal with this risk?

It’s not all bad news

Well, before we move on. It is important that we recognize that currency movements are not always bad news for the expatriate. In reality the fact that currencies can move in two directions means that currency movements can sometimes be advantageous to the expat’s pocket: while the movement of a currency can work mean an expat loses money, it can also mean an expat gains money. This, in itself, offers a mechanism through which expats can manage the risk associated with dealing in multiple currencies.

Currency Hedging

A well-defined hedging strategy is deigned to compensate for any shifts in the value of a currency by acknowledging that a movement in value of one currency will have an impact on the value of another. Expats who use currency hedging will make investments that are aimed at counteracting the impact that a currency movement could have on their savings and do this with the explicit intention of minimizing the exposure that an unfavorable shift in the money market could have.

While this type of strategy can certainly assist to manage the risk and prevent major financial fallout from significant currency fluctuations it does have its flaws:

  • Adequately hedging currency in a manner that negates risk can be very complicated and should therefore only be attempted with the support of a qualified financial advisor.
  • Establishing and maintaining the financial instruments that are required to implement an adequate hedging system will be costly and their costs need to be weighed against any benefits they provide.

For further help and advice on minimizing the risks associated with working overseas and currency movements see our free guide to expatriate contract negotiation, which contains practical advice on negotiating a contract that takes into consideration some of the impacts that currency swings can have on your lifestyle.

Author: ExpatInfoDesk