Travelers should act now to capitalize on a strong dollar for trips abroad, says travel editor: 'Don't be too greedy'
- The U.S. dollar is stronger relative to the euro and other major international currencies than it's been in years.
- That means Americans effectively get a discount versus the recent past on purchases made abroad.
- Travelers can best take advantage of favorable exchange rates by paying for hotels, rental cars and other services now instead of deferring payment.
It's a good time to be an American traveling abroad.
The value of the U.S. dollar has been at its strongest in years relative to many major global currencies of late— meaning travelers can buy more overseas than in the recent past.
Put another way, Americans are effectively getting a discount on hotels, car rentals, tours and other goods and services denominated in many foreign currencies.
But it's unclear how long the good times will last. Some may wonder: Should I act now to lock in a favorable exchange rate?
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"I'd pull the trigger now," said Aiden Freeborn, senior editor at travel site The Broke Backpacker.
"You could hedge and wait to see if things improve, but that could backfire," he added. "Don't be too greedy; accept the fact this is a very strong position."
Here's what to know and how to take advantage.
'Now is a good time to buy foreign currency'
Just how much of a discount are travelers getting right now? Let's look at the euro as an example.
The euro — the official currency for 19 of the 27 European Union members — has been falling in value over the last year or so and hit parity with the U.S. dollar on July 13, for the first time since 2002. Parity means the two currencies had a 1:1 exchange rate.
Americans were still getting a roughly 13% discount from a year ago as of market close on Tuesday, despite a slight rebound off that multi-decade low.
"The exchange rate right now is ridiculous," Charlie Leocha, chairman of Travelers United, an advocacy group, said of the euro's depressed level. "It makes everything in Europe that used to be expensive not that expensive."
But the dollar's strength is broader than just the euro.
For example, the Nominal Broad U.S. Dollar Index gauges the dollar's appreciation relative to currencies of the U.S.' main trading partners, like the Canadian dollar, British pound, Mexican peso and Japanese yen in addition to the euro. It's up more than 9% in the last year.
Further, the index is around its highest point dating to at least 1973, according to Andrew Hunter, senior U.S. economist at Capital Economics. There's one exception: the period from March to May 2020, when international travel was largely inaccessible due to the Covid-19 pandemic.
"I think the big picture is, now is probably a good time to go abroad," Hunter said. "Now is a good time to buy foreign currency, basically."
Why the U.S. dollar has strengthened
The strength of the dollar is largely attributable to three factors, Hunter explained.
Perhaps the most consequential is the U.S. Federal Reserve's campaign to raise interest rates (i.e., borrowing costs). The central bank has been more aggressive than others around the world, Hunter said; the dynamic creates an incentive for international investors to keep funds in dollar-based assets since they can generally earn a higher return.
Further, a surge in oil prices this year hurt the growth prospects in some developed countries (especially in Europe) relative to the U.S. And economic uncertainty (due to factors like inflation and recession fears and the war in Ukraine) has led investors to flock to safe-haven assets like the U.S. dollar.
While the U.S. dollar will likely remain strong for another six months or so, it's likely at or near its peak relative to other major currencies given prevailing economic dynamics, Hunter said — with the caveat that currency moves are notoriously difficult to predict.
"You've always got the uncertainty of what will happen in the future," he added. "The dollar could strengthen even further, but it could fall back."
Pay in advance to lock in low exchange rates
Of course, this isn't all to say Americans will reap financial rewards the world over.
But tourists planning or considering a trip to a country where the dollar is historically strong can lock in that favorable exchange rate by booking a hotel, rental car or other service today instead of deferring the cost, according to travel experts.
This is especially worthwhile for those with a trip at least three months away, Leocha said.
"You can pay in advance, and sometimes you get a discount for paying in advance — so you get a discount and the low exchange rate," he said.
Be aware: In some cases, you may owe an additional foreign-transaction fee for a credit-card purchase overseas. Some travel cards eliminate these fees, though, which generally amount to 3% of the purchase price, Leocha said.
Fees may depend on where the company you're transacting with is based. There isn't a foreign transaction fee if the purchase is through a third-party U.S. entity like Expedia, but there often is one if booked directly through a foreign entity like the actual hotel, Leocha said.
When to convert cash for a trip abroad
Travelers can also convert cash ahead of a trip but should generally only do so if the trip is several months away, according to travel experts.
That's because providers like banks typically offer less generous exchange rates — meaning a customer may be better served by waiting until arriving at their destination country and making purchases with a credit card, especially if it doesn't carry a foreign transaction fee.
While abroad, merchants may offer travelers the choice of making a purchase "with or without conversion" or according to some similarly worded prompt. Travelers should decline that conversion offer — meaning they should opt to do the transaction in the destination currency instead of convert that price into dollars —in order to get the best exchange rate, experts said.
Travelers who'd prefer to convert to cash can hedge their exchange-rate bets by converting half their estimated expenditure now and waiting until later (or their arrival) to covert the rest, Freeborn said.