Common Questions on Foreign Currency Exchange

What is meant by "Foreign Exchange"?
Foreign exchange is defined in the dictionary as the “reciprocal transfer of equivalent sums of money, as in the currencies of two different countries.” In its broadest sense, it means trading of one country’s money for another’s. In most countries of the world, currency unique to that country is used. If you wish to buy products or services from the country, you generally will have to pay with the local currency.

How do I know the value of foreign currencies with respect to the U. S. dollar?
Rates of exchange are established for the U. S. dollar against all major currencies. These rates can, and do, change frequently – occasionally many times during a single day. At the time you buy or sell foreign currency, the then-prevailing rate will determine the amount you will have to pay or the amount you will receive. As with the stock market, there are “bid” and “ask” rates, depending on whether you are buying or selling and, of course, these rates are not the same, moreover, different foreign exchange firms or banks do not always have the same exchange rates, so you could receive more of less foreign currency for the same number of dollars.

How do I know if I’m getting a good exchange rate?
There is only one way to be sure, and that is by comparing rates from competing sources. If over time, one source has consistently better rates, it’s a good bet that that source stays abreast of the marketplace and trades in such a way as to be constantly competitive. It pays to compare before making any foreign exchange transactions.

Why are the exchange rates I’m quoted not the same as the ones printed in the newspaper?
The quotation found in the large daily newspapers are the rates used by the correspondent banks for transactions involving millions of dollars. Except in a very general sense, the bear no direct relationship to a transaction that involves, for example, 20, 200, or even 2000 English pounds.

Won’t I get a better rate if I exchange my dollars once I get to my foreign destination?
This depends on the country. If you use your main bank overseas, you quite likely will be quoted nearly the same rate as you would get on the same day from a competitive source in the U.S. However, if you use hotels, small banks, restaurants, airport offices, etc., as foreign exchange sources you most assuredly would not do as well. The better exchange rates have been found in that country's bank and local travel agencies abroad. Your exchange could also be dramatically affected by the strength of the U.S. dollar at the time of your transaction. Remember, there is often a fee for currency exchange; be sure to factor this in when comparing exchange rates.

How does the strength of the U.S. dollar affect my exchange transactions?
Economic and political conditions dictate the relative strength of the dollar against other currencies. As these conditions unfold, a dollar will be worth more of another currency (strengthens) or be worth less (weakens). For example, if one U.S. dollar is equal to 115 Japanese yen and the dollar strengthened, you might then be able to get 117 or 119 for the same dollar. In the same way, a weakening could drive the exchange rate down to 111, 110 yen per dollar.

What is the proper mix of currency and travelers checks to take on a foreign trip?
If you are going to a country known for currency fluctuations, you may want to consider having two kinds of travelers checks – the first in the currency of the country you are visiting (if the are available; call your local bank) and the second in U. S. dollars. This mix will give you some degree of hedge if the dollar strengthens or weakens. (if it strengthens, you would, of course, convert the U.S. travelers check; if it weakens, you’d use the foreign denominated checks.) Even if you have foreign-denominated checks, it’s still a good idea to have some banknotes (cash). It may save you waiting in a long line t the airport, since you’re sure the cab driver won’t cash a travelers check. Unless it is prohibited by regulation, a good rule of thumb is to have about $50 to $100 worth of local currency at the time of your arrival. Travelers check in the local currency can be used almost like cash at most stores, restaurants, and hotels.

Can’t I just use credit cards when I’m overseas?
Yes and no. While credit cards are widely accepted in most countries abroad, you may be tempted to overspend if you rely mainly on credit cards. Plus, certain establishments will not take credit cards, so it is important to always have cash with you. It is important to note, however, that credit cards are a convenient way to shop abroad. You do not have to worry about handling large amounts of cash, and you usually receive very favorable exchange rates. (you may also use your ATM card in may overseas locations to obtain money in the local currency from your bank at home. Similarly, you can obtain cash from your credit cards at either ATMs or local banks.

Note: There are lots of companies that offer online money transfer services online from one country to another, usually asking for you to deposit your money with them as a first step. Because these transfers take place electronically and you are asked to deposit the money up-front, a wise recommendation is that you only use services that fellow travelers and colleagues may have used successfully. If in doubt, go with the name and reputation because your money is, literally, on the line.