Spending

How exchange rates work — and 5 ways to make the most of them while traveling abroad

Twenty/20

If your fall plans include a trip abroad, you may be able to save a bit more than usual. That's because the U.S. dollar has strengthened, meaning its value is high relative to other currencies.

The exchange rate of the U.S. dollar versus the European currency accepted in 19 countries — the euro — favors American tourists right now. In fact, this exchange rate is hovering near levels last seen in mid-2017, meaning you have more spending power if you travel abroad.

At current rates, your $1,000 will get you about 899 euros, up from about 863 euros a year ago and 878 euros this summer. Five years ago, $1,000 was worth just 784 euros.

Following in the footsteps of fellow Grow writer Myelle Lansat, I also visited Spain this fall. Here are a few lessons I learned about how the favorable dollar-euro exchange rate factored into my trip, and how to make sense of exchange rates in general.

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The exchange rate in action

A majority of my trip-related expenses were booked in advance in U.S. denomination — flights, lodging, and even a tour. But once in Spain, I was subjected to the whims of the foreign exchange market, a.k.a the Forex or FX market.

The euro is what's known as a floating currency, meaning the exchange rate fluctuates based on how traders value each currency. Unlike the stock market, which is open from 9:30 a.m. to 4 p.m. in New York on nonholiday weekdays, the Forex market is open 24 hours a day during the weekdays. The exchange rate is constantly changing, though usually the fluctuations are quite small.

During my eight-day trip to Spain, the euro-dollar rate fluctuated from 1.09565 to 1.10360. It's a tiny difference that effectively means that something costing 100 euros in Spain is the equivalent of paying anywhere from $109.56 to $110.36 in the U.S.

(Other countries "peg" their currencies to another country's currency. Belize, Barbados, Jordan, and the United Arab Emirates, for example, all peg their currency to the U.S. dollar. This strategy means the exchange rate is fixed, with the goal of providing currency stability.)

The euro is what's known as a floating currency, meaning the exchange rate fluctuates based on how traders value each currency. ... The exchange rate is constantly changing, though usually the fluctuations are quite small.

How to save on currency transactions while traveling abroad

Any time you make a purchase or withdraw cash from an ATM while traveling abroad, you're subject to the current exchange rate offered by your bank — and some charge an extra fee for those transactions, as well. That rate is likely to differ from the rates in the foreign exchange market. For example, here are some of the rates I paid while traveling, from worst to best:

  • Withdrawing 110 euros from an ATM at the airport (I needed euros to buy a bus ticket): $123.12 + $4.86 in fees = $127.98. Effective exchange rate of 1.1635.
  • Paying for 23 euros worth of pottery at a store with my credit card: $25.30. Exchange rate of 1.1000.
  • Withdrawing 110 euros cash from an ATM in Barcelona: $120.99 (no fees!). Exchange rate of 1.0999.

You'll probably need cash at some point. You may want to exchange currency at your bank prior to travel, or find ATMs where you'll be traveling that are part of your network. This way you can avoid paying fees from another bank (and potentially from your own, as well).

But the best way to exchange currency is to pay with a credit card, according to a May study conducted by WalletHub. By the site's calculations, this saves travelers 9.3% compared with Travelex currency exchange counters, and 7.1% relative to the average bank or credit union.

WalletHub also offered the following five money-saving tips for international travelers:

  1. Use a credit card that has no foreign transaction fees. Those typically add another 3% to the cost of every purchase abroad.
  2. Bring a debit card that has low international ATM withdrawal fees.
  3. Notify your bank of your travel plans in advance. Otherwise, you risk having your account frozen for what the bank sees as suspicious activity.
  4. Get a phone number to call your bank collect in the event of fraud or if you need a replacement card while abroad.
  5. When paying with a credit card, decline the option to convert your purchase to U.S. dollars. Instead, choose the option to pay in local currency because the exchange rate offered by the business probably won't be as favorable as what your credit card issuer will charge.

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