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Traveling Abroad? Currency Exchange Rates 101

By: Stacy Yu

This summer, millions will travel to far off places, often internationally.  While vacations are filled with fun and adventure, they can also be expensive.  When traveling abroad, vacationers often run into an additional complexity when budgeting for their trips... currency conversions.  Depending on where you are in the world, $1 USD can be converted to be enough to either buy you a cup of coffee, pay for a nice dinner, or not be enough to pay for anything.  These variances make it especially important for travelers to understand the details of currency conversion when setting their travel budgets.

If you are traveling abroad, here are a few tips to help you get a better understanding of currency exchange rates and how they work.

1. Identify Which Foreign Currency You Will Use

While it is possible that some small businesses may accept the US Dollar in other countries it is not the norm.  To ensure that you are receiving the most out of your money when abroad, identify and understand the local currency of your destination.  Doing so will also help you better plan and budget for your trip.

2. Understand the Exchange Rate & Conversion

Currency exchange rates change daily.  Understanding how the US Dollar compares to your destination's local currency is key to staying within your travel budget.To calculate the currency exchange rate:

Step 1.  Find the currency market pair for your destination. Example: Eur / USD (Euro/US Dollars) indicates how many US dollars are needed to purchase 1 Euro.

Step 2.  Know the Exchange Rate. Example: EUR / USD 1.1258 (It costs $1.1258 USD to purchase €1 Euro)

To determine how many Euros are needed to purchase $1USD, use the formula: USD / EUR=1 / (EUR/USD pair exchange rate)

3. Understand the Relationship Between Currencies

Once the currency conversion has been determined, how does that affect your purchasing power?  As a rule of thumb if the exchange rate is less than one unit to $1USD, the dollar is weaker.  As a result, when converting a $1USD to a stronger currency, you will lose purchasing power.  If the exchange rate is more than one unit to $1USD, the dollar is stronger, increasing your purchasing power.

EX.  EUR/USD 1.1258 ->  USD/EUR = 1/1.1258 = 0.88826

In this case, for $1 USD spent, only €0.88826 is returned.  This means that buyers can purchase more for €1 than $1 USD, making the dollar weaker.   As a result, there is a loss in purchasing power relative to the USD, requiring you to budget more for your trip.

4. Beware of Conversion Surcharges.

Currency exchange counters can be seen in almost every international airport.  However, deciding to rush from the airplane straight to the kiosks, take some time to research alternate ways to exchange currency.  Although there is an official currency market exchange rate, currency exchange services will often add on additional charges when converting currency.  Before leaving for your trip, check the currency conversion rates at institutions such as the Currency Exchange and Travelex counters, banks and other financial institutions, including credit card companies to ensure you are maximizing your return during the conversion. 

5. Spend Foreign Coins Before Returning Home

Before returning home, spend as many of your foreign coins as possible.  While US exchange services will gladly exchange foreign bills, most will not accept foreign coins.  So, to avoid having to take left over foreign currency as a loss, buy yourself a nice memorabilia to help you remember your trip.

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