The subject of currency rates probably isn’t high on your list of things to learn about... until you make plans for an overseas trip. Whether you are traveling for business or pleasure, figuring out how to use your dollars – especially in countries that aren’t overly interested in taking them – becomes a real concern. There are plenty of businesses that are happy to help you, but how do you know if you’re getting a good deal? Figuring that out starts with knowing how exchange rates work.
Understanding Exchange Rates
Your dollars aren’t equal to other countries’ currency for reasons too numerous to discuss at length here. The stability of a nation’s government, the rate of inflation and the amount of money that is in circulation are only a few of the variables. (For others, see 6 Factors That Influence Exchange Rates.) That said, here’s a look at how to get a better grasp of exchange rates.
Currency is always expressed in pairs since you’re looking at the value of one country’s money versus another’s. If you’re going to England, for example, you will need to exchange your U.S. dollars for British pounds in order to pay in cash. You would look up the GBP/USD currency pair. Head over to the Investopedia Forex page, look under “Live Rates” and you’ll find a rate of 1.56670 (at the time of this writing). (You can also click here for our “Currency Converter,” select a pair of currencies and hit “Convert Currency” to get the calculation.)
What does the rate mean? Think of it this way: The number shows how much of the second currency (USD) it takes to buy one unit of the first currency (GBP). That means it takes 1.56670 dollars to purchase one British pound. In other words, the pound is worth more than the dollar.
Expect a Markup
Any business that exchanges currency for you will charge for the service. The question is, how much? To figure out the markup, take the difference between the two exchange rates (the one being offered to you by the business and the one that is the market exchange rate), and divide it by the market exchange rate. Let’s say you’re quoted 1.62 for your pound/dollar exchange. First, subtract: 1.62 – 1.56670 = 0.0533. Next, divide: 0.0533/1.56670 = 0.034. Multiply the result by 100 and you now know that the markup is 3.4%. For more on this topic, see How to Calculate an Exchange Rate.
Also watch for fees outside of the exchange rate. If there are conversion fees, you have to factor those into your calculation as well, making the calculation much more difficult.
Avoid the Math
If you’re not much for complicated math, exchange rates and shopping for the best rates, there are alternatives: For one, you can get a credit card without a foreign transaction fee. (See Top Credit Cards With No Foreign Transaction Fee for a list of cards.) Purchases made with this type of card will not produce extra fees. Companies like CapitalOne do not charge a fee, which means any foreign purchases on the card are the same as if you made them in the U.S. You could also use your ATM card for quick cash, but there are likely to be fees associated with it. However, you can keep the fees to a minimum by using a partner ATM, provided your bank is part of a worldwide ATM network alliance; inquire about it before you travel. See The Best Places to Exchange Currency for more on these options.
The Bottom Line
It’s probably a good idea to have a little bit of cash for your trip, but some countries – France and Canada, for example – let you travel largely cashless. That means you may not need much or any cash. But if you do, you'll get the best rate if make the exchange before you leave. Start the process early so you can shop around. If it’s only a small amount of currency, small variations in the exchange rate aren’t worth hours of phone calls and road trips, but having an idea of the exchange rate and the markup businesses are charging is the best way to compare offers.
