Adorned with colorful, bearded and bewigged personages and available by the wheelbarrow at selected locations, foreign currency remains one of the unheralded pleasures of the road. It adds to the exotic mix of travel-and sometimes to your budget, if you don't keep on top of money matters.
A host of global and local factors can affect how much you get for your dollars when you cash them in for local currency. Liberalized foreign-exchange trading rules and a proliferation of traders keep rates in constant flux on the macroeconomic level. Add to that the local variables, from natural disasters to sudden economic calamities, similar to what occurred in Indonesia this year, and your vacation can get very expensive or dirt cheap, depending on when you went to the bank.
Though easy access to almost any currency is largely taken for granted today, it's a fairly recent phenomenon. European and U.S. banks created systems in the 19th century for exchanging large amounts of currency. Soon after, upstart American Express arrived on the scene. Federal administrators at Ellis Island had been disturbed at the growing number of moneychangers who specialized in defrauding arriving immigrants. To cut down on the practice, they awarded the island's exchange monopoly to a then unknown Amex.
Foreign exchange today is a huge business. 'Some $2 trillion gets exchanged every day,' says Richard Olsen, founder of Olsen and Associates in Geneva, Switzerland. 'Until 1971 exchange rates were by and large fixed. The rates would fluctuate in narrow bands, and occasionally governments would adjust the exchange rates if too much market pressure built up. As of 1972, exchange rates started to float.'
That's when smaller institutions began creeping into the field. Today there is no fixed 'market' but a series of financial wholesalers and dealers who set a range of rates around the globe. While some nations continue to fix their rates to specific standards, the value of most currencies is determined largely by the 'forex,' or foreign exchange, markets.
The competitive nature of the exchange market has been both good and bad for the traveler, according to Lars Hansson, president of International Currency Express, a Beverly Hills-based exchange. On the upside, exchange centers have duked it out to get better and better rates for buyers. The average markup between U.S. and European currencies has dropped to three to four percent, while the margin on more exotic currencies is only slightly higher. The commissions might even be lower, he adds, except for the benchmark set by traveler's check kingpin Thomas Cook, which 'posts the worst rates,' says Hansson-'they always charge 31/2 to 51/2 percent.' On the downside, the professional nature of the market means that the vacationer will rarely beat the best market rates.
So where's the best place to exchange? For major European currencies and some Asian cash, travelers can now get rates of exchange in the U.S. about the same as at the point of destination, which was not always the case, Hansson points out. Third World currencies are tougher to buy, though, and carry premiums when exchanged domestically. The best bet remains buying lesser-known currencies overseas. In the battle of the change booths, you'll usually do better cashing your traveler's checks at hotels and restaurants-and in big cities-than at a local bank. The commissions range from two to five percent on average.
Most of us make our first money transactions on arrival at the airport, where you always suspect that you're a dupe of this money-changing monopoly. You're right. Like the airport gift shop, airport exchanges charge higher fees than any other location. 'As a rule, you'll get the worst rates at airports or borders,' points out Edward Hasbrouck, author of The Practical Nomad.
There are much better places to do your transacting in some countries: namely, on the black market. Alternate currency markets continue to thrive in nations where governments try to control exchange rates, but you need to approach them with caution. Black markets develop when states prop up their money with artificial exchange rates, vastly overvaluing it compared to what the open market will bear. It's common in places such as Cuba and China, as well as countries in crisis, such as Indonesia. Black-market money can be several times cheaper than the official cash. But changing money on the black market is illegal, and, depending on how seriously the host nation views the crime, it could come with jail time for the traveler as well as the trader. Financial guru and Barron's contributor Jim Rogers has never hesitated to change his money at black-market rates, as he explains in his book Investment Biker: 'I preferred the slight risk of being robbed by a thief to the certainty of being ripped off by a state bank.' He adds that he seldom had to look for the black market because 'usually it found us.'
Whether calculating on a street corner or in the bank, it's also important to get the math right, making sure multizeroed denominations are carefully figured and that you're up on the latest devaluations. A few years ago the Polish government lopped off a set of zeros on the zloty. Tourists who thought they were beating the odds found instead that they had bought relatively worthless piles of big bills. Bring along a pocket currency calculator; it can save you big emalangeni (Swaziland) or levs (Bulgaria).
Traveler's checks and American Express cards continue to be the easiest and safest ways of accessing and carrying funds, maintains Hasbrouck. By using credit cards overseas, travelers can get a better exchange rate, because no markup attaches to the transaction. A number of hotels and restaurants in developing nations will not accept plastic, however, even if a Visa sticker is proudly displayed in the window. Bring a card along, but don't count on using it all over the place.
The same applies to ATM cards. They've spread across the world but may not be in the exact corner you happen to be in. Banks also typically attach exorbitant fees to both ends of a Paraguay-to-U.S. bank transaction. By contrast, nearly everyone accepts traveler's checks, and, unlike cash, they can be replaced. Carry at least $100 in U.S. small bills and keep the rest in traveler's checks, Hasbrouck suggests.
The American Express card also provides a means of banking when abroad. Amex will cash a personal check of up to $1,000 or more, depending on the color of your card. And the check is honored by your Amex account, so you don't have to wait for money to be forwarded. As a result, a long-term traveler need only carry part of his or her funds for a trip at any given time.
'This is the only cheap, fast, reliable way to have money sent to yourself while traveling,' states Hasbrouck.
It also cuts down on the amount of cash weighing down your pants.
FromEscape(Dec. 1999). Subscriptions: $18/yr. (4 issues) from Box 462255, Escondido, CA 92046.