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Planning your next Trip?

By: gerron woodruffe

Currency movements can affect the cost of a trip. For example, a favorable rate of exchange means that your local currency is worth more and will provide you with more buying power. In fact, travelers whose local currency has appreciated dramatically will find that they will be able to afford much more on their vacation this year. On the other hand, a less favorable exchange rate of exchange means that your currency will be worth less resulting in less buying power overseas. If your domestic currency has depreciated significantly you may find your options more limited. As a traveler, your main concern should be to get the most favorable rate possible. In order to do this, however, one must first understand the foreign exchange market.

In the foreign exchange market, the currency of one country is exchanged for an equivalent amount of the currency of another. Foreign exchange rates are not static, but change dynamically-sometimes many times within a single minute. At this point, however, most of you might be asking, why does it take more dollars to buy a euro this week than it did last week? Why would it cost you more today to buy a cup of coffee in another country than it did before, even though the price has remained the same there? The answer has to do with the value of a country's currency relative to the price of another currency.

Currencies, just like any other commodity that can be bought or sold, are subject to the laws of supply and demand. When more people want a particular currency, the cost of the currency in terms of other currencies will go up. When demand decreases or people do not want to hold a country's currency, the value will go down. One factor that directly affects demand for a currency is international trade. For instance, if I buy a Japanese car in the US, I give dollars to my dealer, who gave dollars to his distributor, and so on. But before the profits are banked by the carmaker in Japan, they are converted into Yen. There is a surge of buying of Japanese cars this month, the result is going to be increased demand for Yen-which will in turn cause an appreciation in the Yen's value. An increase in international investment into Japan would have the same effect, since more money is being converted into Yen to purchase Japanese assets.

As a traveler, understanding currency fluctuations will help you to take advantage of favorable rates of exchange and spot a deal when you see one. For example let's look at the EUR/USD (Euro vs. US dollar) currency pair did over the last three years and how any changes might have affected tourism in each of them.

Currency pairYear Rate of exchange (highest)Rate of exchange (Lowest)

EUR/USD 2003$1.2646$1.0333 2004$1.3666$1.1758 2005$1.3579$1.1864 From looking at the table taken from www.dailyfx.com, we can see that in less than 3 years, the euro steadily rose in value against the US dollar going from $1.2646 to a high of $1.3579. This favorable rate of exchange for Euros vs. US dollars made traveling to the United States a much better deal in 2005 than in both 2003 and 2004. For the traveler who noticed this long term upward trend early could have probably delayed his 2004 trip to the United States knowing that his hard earned cash would go further in 2005.

When planning a trip to another country all individuals should keep in mind that the major currencies tend to move +/- 1% in a given day, which is a relatively minor move unless you are changing thousands at a time. This means that visiting smaller countries with less developed economies should warrant more research and planning since, these countries' currency would prove more volatile to rate changes. A great way to find out about the current state of exchange rates is to visit GoCurrency.com, a currency conversion site that covers over 150 currencies worldwide.

To sum up, whether it's a business trip or a second honeymoon, a working knowledge of the foreign exchange market can and will make any international journey a more relaxed one.
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