Foreign Currency Affairs

Travel is one of the quickest ways to make your first million. I
made mine in Ecuador, in local sucres, at 4,500 to the dollar. The
price of success: I had to master the art of walking with my
fortune stuffed down my pants.

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

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

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

FromEscape(Dec. 1999).
Subscriptions: $18/yr. (4 issues) from Box 462255, Escondido, CA

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