This summer looks like a great time for Americans with plans to travel abroad. The U.S. dollar is now at a nine-year high and could go even higher, so that people who travel almost anywhere outside the U.S. will find that their cash can buy more.
To understand why the dollar is currently doing so well against other currencies, UConn Today asked Kanda Naknoi, an assistant professor of economics at UConn Stamford who specializes in currency exchange rate dynamics, to explain the global currency turmoil and its implications for travelers.
Q: I’m thinking of traveling overseas this summer because the dollar is strong. Why is it so strong now? Is there any indication as to how long this will continue? Could the exchange rate be vastly different next summer?
A: It’s strong now for two reasons. First, the financial problems in Europe – especially Greece – caused investors to sell euros and buy dollars, and their buying pressure raises the value of the dollar. Second, the Fed – the U.S. central bank – has sent signals that it will likely raise the interest rate in the fall. A rising interest rate will make dollar-denominated bonds attractive, and as a result, investors have begun selling other currencies and buying the dollar. The dollar will remain strong for as long as the financial problems in Europe continue, and as long as the anticipation of a rising interest rate continues. So it’s important to follow financial news about those two topics. The exchange rates for next summer can’t be predicted now, because a lot of things can happen between this summer and next.
Q: Are there specific currencies that provide a better margin when exchanging U.S. dollars?
A: Brazil and Turkey are good choices in terms of prices. Their currencies have depreciated more than the euro in the past one year. Some countries outside the eurozone, such as Denmark and Poland, fix their exchange rates with the euro, so they offer a bargain at the same rate as eurozone countries.
Ukraine and Russia offer some of the biggest bargains in terms of exchange rates. In the past year, the Ukrainian hryvnia has depreciated 75 percent, and the Russian ruble has depreciated by 50 percent. However, there might be some political risk involved in traveling to these countries. Regardless of the exchange rate, before purchasing air tickets travelers should always check the list of “travel alerts and warnings” provided by the State Department.
There is currently a warning against traveling to eastern Ukraine, but the western part of the country should be alright. This could change over time, though.
Q: Are there some countries whose currencies have remained strong against the dollar and where I would not experience a savings?
A: The countries whose currencies have remained strong are Costa Rica and China. Also, some countries – such as Panama, Ecuador, and most countries in the Caribbean – peg their currency to the U.S. dollar, so prices there would not be affected by the strong U.S. dollar.
Q: Are there trip costs that wouldn’t be impacted by the currency rates? For example why hasn’t the global drop in oil prices led to lower airfares?
A: Other than airfares, I can think of none. Meals, hotels, trains, and buses in the country of destination are priced in the foreign currency, so their dollar value is always impacted by the exchange rate, unless the country is one of those that peg their currency to the dollar. As for the airfare, it depends on both supply and demand. Although on the supply side the cost of fuel dropped, on the demand side the number of world travelers increased, thanks to economic growth in developing countries. Unfortunately for travelers, the demand factor allows airlines to raise airfares without worrying about losing passengers. To get the best airfares, the timing of purchasing the tickets can make a big difference. For international travel, purchasing tickets at least six weeks before the departure date helps get a good deal. Willingness to make a connection also reduces the cost.
Q: Is there any way to quantify how much further my money will go in purchasing meals in Europe?
A: It’s very easy to find out the costs of meals in Europe. Tripadvisor.com provides very useful consumer-based price comparisons and reviews of restaurants (and other travel-related services). I’ve used its price comparisons and reviews many times when traveling internationally and I’ve found its information to be accurate and extremely helpful. One caveat is that consumers tend to report prices in dollar figures instead of the local currency. But the date when the prices were reported is also displayed, so people who are planning to travel can check the exchange rate on the report date and compare that with the most current exchange rate. The exchange rates, for the U.S. dollar to the euro for example, are available at Bloomberg.com.
The exchange rates that Bloomberg.com provides are wholesale rates without commission or transaction costs, which travelers have to add to the cost of buying euros. Still, the fluctuations in the exchange rates over time are a useful gauge, as transaction costs don’t usually vary much.
Q: With my spending money, are there durable goods that are particularly worth buying overseas at the moment, given the strength of the dollar?
A: Travelers must exercise caution if they’re interested in buying foreign electronics. Foreign electronics might not use the same voltage as U.S. devices. Even if they happen to use the same voltage, their plugs might have different prongs, and in that case plug converters will be necessary. The Swiss franc is only 5 percent weaker than last year, so I’m not sure if a 5 percent reduction in prices make it worthwhile to carry Swiss watches all the way from Switzerland. Small musical instruments such as violins in the euro zone might be worth buying. However, the personal duty-free exemptionvaries, depending on the country visited: it could be $200, $800, or $1,600.
Also, before making a purchase, it’s a good idea to check the list of merchandise that’s prohibited from entering the U.S.
Q: Are there any good financial planning resources to consult about travel implications given the current exchange rate?
A: Any good travel agent can help with planning a trip. There are also some travel agencies that specialize in planning trips for students.
However, let me add some tips based on my experience:
- A travel agent may encourage customers to buy rail passes, but I’ve found that there are times when rail passes are not worth buying. For instance, if you plan to spend many days in a small number of cities, buying regular rail tickets may be cheaper. Travelers can also check prices directly from the rail companies. Today, many foreign rail companies let foreign buyers purchase tickets online with advance discounts. For example, there’s a particular site that provides the websites of all European rail companies.
- Combining various modes of transportation can save on costs as well. For example, the cost of flying to a major hub in Europe and taking a train is sometimes cheaper than flying to the final destination directly.
- Before leaving the U.S., travelers should check with their banks about international ATM fees and debit or credit card foreign transaction fees. Nerdwallet.com provides a fee table, but the information it gives may be outdated.
- Selling the dollar for foreign cash at a foreign exchange booth at an airport or a bank in the destination country incurs steeper transaction fees than the fees charged by U.S. banks for international use of ATMs and debit or credit cards. If travelers would like to obtain some foreign currency in the form of cash for peace of mind, then selling the dollar before leaving the U.S. will likely get a better exchange rate than selling in the destination country.
By: David Baumann | Story courtesy of UConn Today