If you've ever thought about taking that grand European vacation you've always dreamed of, now may be a great time. In the last year, the euro has lost nearly a quarter of its value versus the U.S. dollar. The slide in value for the euro zone's shared currency now puts it at a level we haven't seen in nearly 12 years, and American tourists could be among the biggest beneficiaries.
While the concepts around foreign exchange and currency markets may seem daunting for many, the core ideas are relatively easy to understand. When a currency like the dollar appreciates, it's able to buy more stuff that's priced in currencies outside our borders. When a currency loses value, it isn't able to buy as much. In this case, the dollar's gain relative to the euro means that greenback-based consumers have more purchasing power to buy things denominated in euros.
Let's say a hotel room in Paris costs 300 euros. It would have cost you around $415 to pay that a year ago, when euros cost $1.385. That same 300 euro room would only cost $318 today with euros costing $1.06. Imagine saving $100 per night on your hotel room, and then applying that same level of savings to taxi fares, dinners out, museum admission fees, etc. That's why seasoned travelers are licking their chops for a chance to take a trip across the Atlantic.
However, the price levels you're seeing in euros on CNBC and in newspapers around the world won't necessarily be the price you'll get when you actually go on vacation. It all depends on how you go about buying euros.
The way that many travelers convert their dollars into euros involves using a currency-exchange kiosk or store at the airport or your mall. While this option may be convenient, it can be costly. For instance, according to retail currency exchange giant Travelex, a euro costs $1.1969, despite the current interbank market rates of $1.06.
That means it costs 13 percent more to buy your currency there than what's indicated in the market. Retail foreign-exchange kiosks do represent an efficient way to get your hands on cash immediately, but just be prepared to pay more.
Other options can be more cost effective. Many travel experts will advise using credit cards to do the bulk of your spending when on vacation, and for good reason. The rates that banks and credit card companies use in converting foreign currency charges to dollars is much more favorable than retail currency shops, but there are also fees to be aware of. All of these factors affect what ultimately shows up on your credit card statement after you've spent money in a foreign currency.
For instance, American Express charges a 2.7 percent foreign transaction fee for any purchases made outside the U.S. That's on top of whatever the prevailing exchange rate is for converting your purchase to dollars. When asked about how the exchange rate is calculated, the company's customer service representatives referred us to website www.x-rates.com.
The site arrives at an exchange rate based upon what it says is a "commercial grade rate feed, which blends rates from a large array of independent sources." A check of rates provided by the website revealed that they were very close to current market levels. So, with a credit card like American Express, you can expect a transparent exchange rate that's close to current market levels, along with a foreign transaction fee.