What are the disadvantages of foreign exchange?

Answer 1

I will rephrase the question: What are the disadvantages of using or holding multiple currencies? The original question is a little vague and implies that you are changing from one currency to another, so a minimum of 2 currencies are involved in the transaction.

The whole purpose of exchanging currencies is to be able to pay for goods in a different currency than you currently hold. Say for example you currently hold USD and you travel to Thailand. Most goods are available in THB. So you would have to exchange your USD --> THB in order to make the purchase. Here are the disadvantages:

1) You have to pay a fee to do this, which for a retail exchange is the minimum of the bid/ask spread. (You sell USD and buy THB).

2) If you no longer need THB, you must change it back into USD or whatever currency you want to use next. There is another exchange fee for this.

3) There is a small possibility that the banking system of the currency you are holding could become insolvent due to political pressures or economic forces, making that currency worthless or depreciate in value.

4) Different countries have different banking laws that comply primarily with either cultural customs or anti-money laundering policies.

For example, if you were to convert currency from [any] to THB and deposit it into a regular Thai bank account. Then you wish to wire money outside of the country as a foreign national without a work permit, you may run into problems. You would have to have an alternative method of transferring the funds outside the country.

There are numerous advantages also to holding multiple currencies; basically the opposite is true for the reasons above. It is possible for certain currency to APPRECIATE in value. Also, there may be greater flexibility in the ability to move money around in certain countries vs others.