Exchange Rate Basics

Exchange Rate Basics

When you are traveling to foreign countries from the United States, it is often necessary to exchange your American dollars for the local currency. When you trade currency in one form for currency in another, you will see that it is not a dollar for dollar transaction. Instead, the value of a U.S. dollar in Mexico is different from the cost of a U.S. dollar in Canada, Australia, or even France.

To make matters even more interesting for travelers, currencies in the world market continuously gain and lose value, so the exchange rate is always in a state of flux. You might discover that the same dollar is worth more in pesos, pounds, or yen tomorrow than it is today. Alternatively, it could be less. It is all about the economic conditions in one country relative to the economic conditions in another.

Do a little research before you head out to exchange currency. Know what the going exchange rate for the currency in question is on any given day and then look for places known for dealing fairly with travelers looking to exchange funds. Smarter Travel recommends places like the following for fair exchanges:

  • Banks
  • Hotels
  • Post offices
  • American Express offices

Further, they go on to advise against tourist-filled areas like airports, train stations, and major attractions. Smarter Travel also recommends that you avoid exchange rates that appear too good to be true as they could be scams or may even involve counterfeit money.

Exchange Rate Overview

While some credit cards offer conversions to local currencies without fees, know that plastic is not as universally accepted outside the United States. You could find yourself in a bit of a bind if you planned to rely on your credit and debit cards to be the substantial spending method for your trip.

While these features from credit card companies are convenient in certain circumstances, they may not offer quite the assistance you are hoping for as you travel the globe.

Exchange Methods

There are two primary methods for exchanging currency:

  1. Floating currency.
  2. Pegged currency.

The current market determines floating exchange rates. Supply and demand can have a substantial impact on how much a currency is worth on any given day with floating currencies. That is more common in countries that have economies that are mature and stable, like:

  • The United States
  • Great Britain
  • Australia
  • Canada

Floating currency makes exchanges more efficient because the markets adjust automatically for fluctuations in value.

If you are traveling to countries or regions where the currency is less stable, you will probably encounter a pegged currency system. That is an attempt by the government to prevent things like runaway inflation. You will likely only see this type of exchange rates in third world countries and other locations with emerging economies. One suggestion in this situation is just to convert what you need in these currencies during your time in that country.

Best Practices for Exchanging Currency

USA Today has an excellent suggestion: convert at least some of your money to local currencies before you travel rather than after reaching your destination. Many of the more popular tourist locations charge higher exchange rates. Another bit of advice to consider is to visit banks and ATMs for exchanges as they often have lower rates.

You should also pay close attention to surcharges various facilities charge for converting currency. Some add a flat fee and others charge a percentage. If you are paying a hefty flat fee, it is worth considering the conversion of a significant amount of currency in a single transaction, rather than making multiple smaller exchanges.

One of the biggest pieces of advice to offer when it comes to exchange rates, though, is that you should make sure you know the policies of your credit card for foreign currency transactions. Most credit cards are very happy to offer them but may charge fees you are not aware of for doing so. Make sure you read the fine print and know your company’s policy when it comes to foreign currency purchases.

Traveling the world and visiting exotic destinations can be very exciting. If you do not pay attention to things like exchange rates, though, you could find yourself paying much more than necessary for the privilege.