Exchange Rates 101

While decades of trade- and travel-related intermingling have slowly diminished the fundamental differences between world cultures, one antiquated aspect of international travel has stayed intact: currency exchange.

Sure, you probably aren’t going to cross a border with hundreds of dollars of cash denominated in your home country’s currency in tow. But even if you’re with the program and get your foreign money directly from an ATM, you’ve always got to remain mindful of how much of your own currency your withdrawal represents, right?

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In fact, most international travelers ascribe far too much importance to currency exchange rates. Once you understand the logic behind currency exchange rates and a currency exchange rate’s effect on prices, you’ll learn to assess prices and amounts relative to the place where you’re traveling. You’ll become a better judge of value and, ultimately, spend your foreign money more wisely.

The Purpose of Currency Exchange Rates
Contrary to popular belief, the primary purpose of currency exchange isn’t to allow travelers to spend money abroad. Rather, the value of a country’s currency relative to “reserve” currencies (such as the U.S. dollar or euro) affects the prices of its exports and the ease or difficulty it has purchasing imports. Although an exchange rate that favors your country’s currency might seem like a good thing, weaker local currency, particularly in countries that depend on imports, can lead to inflated prices of products, services and, ultimately, a higher cost of living for locals and foreigners.

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Exchange Rates and Prices
To think of it another way, the currency exchange rate isn’t a proportionate measure how cheap or expensive a country is. Although one U.S. dollar typically buys around 500 Chilean pesos, for example, Chile isn’t 500 times cheaper than the United States. Rather, long-term strengthening or weakening trends in currency exchange rates cause the costs of products and services in a country rise or fall gradually. Still, trends aren’t always easy to predict. If one U.S. dollar buys 490 Chilean pesos in March but just 420 by December – i.e. the currency has strengthens – prices in Chile may actually rise, since Chile depends on exports and higher prices make its exports less desirable, weakening its overall economy.

The Danger of Converting Prices
With this in mind, it’s pointless to convert prices in foreign currency into your own currency. The approximate cost of a particular product in U.S. dollars or euros, for example, has little bearing on whether that item is actually cheap or expensive. Although a bottle of contact lens solution at a Swiss pharmacy that costs CHF 41 (about $45) might seem expensive, the fact that Switzerland’s minimum wage is CHF 30 (about $33) per hour puts prices in Switzerland in perspective.

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Learning the Value of Foreign Currency
Thankfully, you don’t need to be privy to or even aware of economic data like minimum wages and per-capita GDP figures in order to learn the “real” value of your foreign currency. Simply being perceptive of pricing trends in a city or region where you’re traveling is usually enough. You might not think anything of paying a paltry 25,000 Vietnamese dong (around $1.20) for a delicious bahn mi sandwich in Saigon, until you realize that an even tastier sandwich at a smaller stall down the street runs you just 15,000 dong. Once you learn what foreign currency should buy, you become better attuned to what you should (and shouldn’t) buy.

General Currency Exchange Tips
Even if you keep all these currency exchange pointers in mind when you travel, you’re still at risk of losing money – and, therefore, falling victim to stress – from the currency exchange process itself. If you withdraw foreign money from ATMs using a debit card from your home country, call your bank before you leave to see if they partner with any foreign banks. If they do, ATM usage fees may be lowered or waived, saving you a pretty penny over the course of your trip. Still exchange money the old fashioned way. Make sure not only to compare exchange rates themselves, which can fluctuate between different money changers, but also the additional “commission” each exchange booth charges.

 

About the author

Robert Schrader is a travel writer/photographer and editor of the blog Leave Your Daily Hell, your source for destination information, travel photos, practical travel advice and inspirational travel essays. Robert’s writing and photography has been published on websites such as CNNGo, Tripping and Shanghaiist and in print publications like That’s Shanghai and East & West magazines. Robert’s travels have thus far taken him to more than 40 countries and to all six inhabited continents. Follow the Twitter feed, “Like” the Facebook page or add Robert to one of your Google+ circles.

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Published: March 27, 2012