exchange rates

8 Money Lessons I Learned From Three Weeks in Europe

Holly Johnson — Wed, 23 Aug 2017 08:30:11 +0000

In early June, my husband and I took a bucket list trip to Europe with our kids. While we've visited countless countries worldwide as a couple, this was our first "big trip" with our daughters, ages six and eight. In addition to the four of us, we took a family caregiver to help with the kids and give Mom and Dad a break. Over the course of 19 days, we spent time in Germany, Italy, and Switzerland. The entire ordeal was exhausting, but it was an absolute blast!

Fortunately, we planned far enough ahead that we didn't spend too much out of pocket while we were there. By leveraging travel rewards credit cards and setting a daily spending budget, we were able to get the entire trip, which would normally cost $20,000 retail, for around $3,500. (See also: 5 Steps to Getting a Free (or Close to Free) Vacation with Credit Cards)

In addition to the virtues of planning ahead as a savings strategy, we learned numerous financial lessons during our travels. While we were aware of most of these lessons already, seeing the world through our children's eyes served as the perfect reminder of the reasons behind some of our most important financial decisions.

Here are a few lessons we relearned thanks to our trip abroad.

1. Failing to plan means planning to fail

One of the most expensive components of our trip was dining, mostly because there were five people in our group. No matter how cheaply you try to eat, feeding five people three meals a day means your food budget adds up quickly.

While we tried to minimize our food costs by eating breakfast in our condo and searching for budget options, there were times where we didn't plan ahead and paid a steep price for our lack of preparation.

One meal in particular stands out. We traveled by train to Rome in the morning and arrived in early afternoon without researching restaurants or stores in the immediate area. In a tired and hungry daze, we entered the first restaurant we walked past near Piazza Navona.

Unfortunately, we paid big time for this oversight. Not only was the food overly touristy (pictures on the menu — blech), but our lunch set us back nearly $90. If we had searched ahead of time, we would have known we could have found much cheaper (and probably tastier) options had we walked a block in the other direction. (See also: 4 Secrets to Eating Great Food for Cheap While Traveling)

2. Expensive does not equal better

That meal also served as a reminder that expensive isn't always better. We paid $90 for a lunch that was mediocre at best on that particular day, but at other times we enjoyed meals that were absolutely delicious and downright cheap.

One that comes to mind was a meal we had in nearby Florence, Italy. In order to keep our food budget under control, we started researching local restaurants once we arrived. Eventually, we stumbled upon a sandwich shop — Panini Toscani — that was uber-cheap but was also the third highest rated restaurant in Florence.

We wound up eating there twice. The food was delicious and convenient, and our total meal for five people was less than $20 both times.

3. Even budget trips can be fun

By the time we got to Switzerland (our last stop), I was pretty tired of spending money in general. So, when we had our final "free day" in the country, I spent some time looking for something fun and affordable to do. (See also: 7 Countries Where You Can Travel on $30 a Day or Less)

Eventually, I remembered a town we drove by that had the most beautiful, clear-green lake I had ever seen. After looking up the details, I found that the tiny village of Lungern had a public beach and a few waterslides with a daily admission cost of about $5.25 per adult.

This relatively cheap day was probably the most fun we had. All of us swam and rode waterslides the entire day, stopping only to have a low-cost lunch.

It just goes to show that budget travel can absolutely be fun, and that you don't have to spend a ton of money to enjoy yourself.

4. There's more than one "right way" to do things

One of the most rewarding components of travel is watching my kids react to the many ways other countries handle things differently. My kids were obsessed with euros, for example. They couldn't understand why anyone would choose to offer two euros in the form of a coin.

I also had to explain why we didn't tip as much as we normally do. Since workers in Europe are paid higher wages, you don't have to tip 15–20 percent like you do in the states.

While we could argue all day over which way is better, I told my kids there is more than one "right way" to do things sometimes. (See also: 7 Countries Where You Don't Have to Tip at Restaurants)

5. We actually need very little

While I wasn't sure we could pull it off, we made it through the entire trip with just carry-on luggage and two school-sized backpacks of stuff. It helped that one of our condos had a washing machine, but I was still amazed we enjoyed ourselves without many comforts from home.

This just goes to show that most of us don't need a lot to be happy. We need clothes, food, and shelter, but everything else is optional. We can be happy and content without having a bunch of stuff to bog us down.

6. Most people are honest, but not everyone

Most of the people we dealt with abroad were both kind and honest — except for a couple of small incidences. First, we encountered a taxi driver who tried to charge us $28 (instead of running his meter) to take us four blocks in Rome. Not only was this outrageous since we'd paid $7 for the same ride earlier that day, but it was illegal for him to do this since the city of Rome regulates official taxis.

Second, when we got home from the trip, we received a fraud alert from Chase. Apparently, someone had swiped our card information and tried to make a purchase in Peru.

This kind of stuff happens no matter where you are, so it's important to always stay vigilant. (See also: 7 Ways to Protect Yourself From Theft While Traveling)

7. Exchange rates matter

Whenever I travel abroad, I almost always struggle to keep track of the currency exchange rate and how it affects everything we buy. But, since a single U.S. dollar is currently worth just .87 euros, this is an important detail to keep in mind. If something costs 10 euros, for example, you're actually paying $11.55.

While I used a credit card with no foreign transaction fees to pay most of our expenses, I tried hard to impart this lesson on our kids. No matter where you are in the world, chances are good the money isn't worth the same as at home. And, if you don't pay attention, you could wind up spending a lot more than you think!

8. Some experiences are worth the money, even if they're expensive

While we definitely saved a bundle on this trip due to the way we leveraged credit card rewards, we still spent $3,500 of our hard-earned dollars. On top of that, I probably spent 30–50 hours planning not only our credit card rewards strategy, but our hotels, flights, and trains.

The thing is, I don't regret a single cent — or a single second. Over my lifetime, I've learned that some experiences are worth the money and the time, even if it seems like a lot.

It's hard to put a price tag on a fun family trip that exposed us to cultures in a completely different part of the world. I believe it was priceless. Some memories are worth saving up to splurge on. (See also: How to Build Your Best Travel Budget)

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This article is from Holly Johnson of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

5 Travel Destinations That Are Cheaper Due to a Strong U.S. Dollar

Amanda Gokee — Tue, 28 Mar 2017 09:30:32 +0000

The past year or so has brought great news for American travelers, as the U.S. dollar has surged in value against other currencies. That means it's cheaper for Americans to travel overseas. We took a look at some countries where the exchange rate is notably improved from 2014, when the U.S. dollar was considerably weaker. These five destinations are particularly attractive now.

1. China

If you've had your eye on China for a while, now is a good time to book a trip. The dollar is currently strong in comparison with the yuan, which was devalued by 6.6 percent in 2016. The U.S. dollar is now 14 percent stronger against the yuan than it was in 2014, meaning travel there for Americans should be about that much cheaper.

There is plenty for the adventurous traveler to see in this vast country, with some of the most famous tourist sites, including portions of the Great Wall of China, situated in or near Beijing. A tour of the wall and the imperial palace known as the Forbidden City costs around 240 yuan. At $35, that's about $5 cheaper than it would have been in 2014, thanks to the exchange rate. Everything from hotels to internal flights should be cheaper, too.

2. Switzerland

According to the World Economic Forum's biennial Travel and Tourism Competitiveness Report, Switzerland ranked last in "price competitiveness" in 2015, making it the most expensive country to travel to. But the strengthening dollar is making it a little more affordable. The local currency is the Swiss franc, which, at the time of writing, was worth about one U.S. dollar. That's 13 percent less than the franc's high point in 2014.

According to Lonely Planet, it costs the average midrange traveler around 200–300 Swiss francs a day to travel in Switzerland. With the current 13 percent savings on the exchange rate, you could save $26–$39 a day when compared to the same trip in 2014.

Switzerland is a stunning country, where imposing castles from the Middle Ages dot the mountainous landscape. No trip to Switzerland would be complete without a trip to the Swiss Alps, which have long attracted visitors for hiking and skiing.

Switzerland's cities, such as its capital, Geneva, are clean and home to some of the most important international organizations, such as the World Health Organization. Smaller villages such as Gruyères have a fairy-tale charm. The town is famous for the Gruyère cheese that is produced there, and offers authentic fondue and tours of the cheese factory where you can learn how the cheese is made.

3. Sweden

Although Sweden has a reputation for being an expensive country for travel, the Swedish krona has dropped 42 percent against the U.S. dollar since 2014, making now the perfect time for a visit. The exchange rate at the time of writing was about $1 to 9 krona.

According to Lonely Planet, the average midrange traveler spends about 1,000–2,000 Swedish krona a day. That translates to $111–$222, a whopping $92 cheaper per day cheaper than it would've been in 2014.

With its many coastal islands and inland lakes, Sweden's geography has long made it a destination for those looking to spend time on the water, engaging in activities such as kayaking. If you enjoy winter sports, Sweden is also an amazing cross-country skiing and dog-sledding destination. You may even be able to catch a glimpse of the ethereal northern lights in the northern region of Lapland — in particular, the Aurora Sky Station in Abisko National Park.

Even for city dwellers, water is an integral part of life. The Swedish capital, Stockholm, is built across 14 islands connected by 57 bridges. Stockholm is an elegant city, with lively music, art, and fashion scenes. Other cities, such as Visby, contain medieval ruins amid charming cobblestone streets.

4. Spain

With the euro falling in value against the U.S. dollar (down 24 percent since 2014), travel has become more favorable to the 19 countries that make up the eurozone. You could consider a traditionally more expensive destination such as France or Italy, and watch your dollars go further than they have in years. Or you could head to more affordable Spain, where a beer in some parts of the country will cost you just a little over a dollar.

Spain is a diverse country, made up of 50 provinces and five languages, including the official Castilian Spanish, as well as Basque and Catalan.

The Pyrenees mountains offer wonderful recreation opportunities, including winter skiing and hiking along the Camino de Santiago pilgrimage routes. The coast features good diving in the Mediterranean Sea. If a buzzing night life is more your scene, head for the tourist-heavy but beautiful islands of Ibiza and Mallorca.

5. Mexico

The dollar-to-Mexican-peso exchange rate is extremely advantageous at the moment, with one dollar worth about 20 pesos. This rate is 54 percent better than it was in 2014. Since this destination is in North America, you won't have to worry about expensive airfare either.

Mexico is a fascinating country to explore, with beautiful colonial architecture in towns such as Campeche, Guanajuato, and Zacatecas, which have put significant effort into conserving historic buildings.

The Pacific coast is a great destination for surfing and lazing on pristine, white beaches, and it's often overlooked by tourists heading to the Caribbean meccas of Cancun and Playa del Carmen (which offer their own charm, to be sure).

Living in Mexico City, I will admit to a bit of a bias for this cosmopolitan capital, which offers a vast art scene, delicious cuisine, and no shortage of music and entertainment options to visitors from all over the world.

Regardless of where you choose to go, one thing for sure is that 2017 is shaping up to be the year of the American traveler. Take advantage of a strong dollar and see how far you can go.

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This article is from Amanda Gokee of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

11 Ways to Avoid Bank Fees While Traveling

Nick Wharton — Fri, 08 Jul 2016 09:00:12 +0000

The worst thing to get charged for when you're on vacation is a fee for using your own money. Even worse, there are fees you may not even know existed until you return home and check your statement. They're not all small fees, either. Some of them can be as much as $7 per transaction.

Imagine if over the course if your trip you visited the wrong ATM 10 times and ended up with $70 worth of fees. Fear not, though. I'll go over the most common fees you may run into on the road and show you how to avoid them.

ATM Fees

ATMs are probably going to be your biggest enemy when it comes to overseas bank fees. Most American banks will charge you between $5–$7 per overseas ATM withdrawal. If you travel a lot or take out money frequently while on the road, these can quickly add up.

The best way to save money on bank fees is to do a little bit of preplanning before your trip. You have a couple of options that can help you eliminate ATM fees.

1. Capital One 360

Capital One 360 Checking account holders can use any ATM without incurring usage or foreign transaction fees. This is an online only account (which is why it has no fees), but it even earns interest. Those are two big bonuses for anyone who travels internationally frequently.

2. Charles Schwab

Charles Schwab accounts have no fees and they reimburse all your ATM fees at the end of each month.

You have to open a high-yield checking account in order to qualify, but their debit card can be used in any ATM around the world and you'll never pay a cent in bank fees. There is no minimum deposit required and no monthly service fee either.

3. TD Bank

With the TD account, you are charged a flat $2.50 fee for ATM withdrawals and no foreign transaction fees.

4. Global ATM Alliance

A group of international banks have come together to form the Global ATM Alliance. Basically, any customer who holds an account with a participating bank can take out money from any associated ATMs without a fee. Note that while you won't be charged for using a member bank ATM, you may still get charged foreign transaction fees based on the amount you withdraw. Make sure you check with your bank precisely what their fees are.

The Global ATM Alliance includes the following banks:

Bank of America (United States)
Barclays (England, Wales, Spain, Portugal, Gibraltar, and certain countries in Africa)
BNP Paribas (France, Ukraine)
China Construction Bank (China; Bank of America card holders only)
Deutsche Bank (Germany, Poland, Czech Republic, Spain, Portugal, and Italy)
Banca Nazionale del Lavoro (Italy)
Santander Serfin (Mexico; Bank of America card holders only)
Scotiabank (Canada, Caribbean, Peru, Chile, and Mexico)
Westpac (Australia, New Zealand, Fiji, Vanuatu, Cook Islands, Samoa, Tonga, Papua New Guinea, and Solomon Islands)
ABSA (South Africa)
UkrSibbank (Ukraine)

5. Avoid Credit Card Fees

Many credit cards charge a 3%–5% fee on any purchase made overseas. Think about that for a second. If you go on a two-week family vacation and spend $6,000 out of country, you would end up paying $180 in fees. Luckily, not all credit cards charge this fee, so choosing the right credit card for travel can save you a lot of money on the road. (See also: Best Travel Rewards Credit Cards)

A Few Extra Tips

Take a few other extra steps to make sure you aren't spend a few more extra dollars every time you reach for more cash.

6. Don't Use Random ATMs

While it may be convenient to use the ATM at your hotel or at the corner store, these are typically the ones that will cost you the most in fees.

7. Don't Exchange Money on the Street

Sometimes it's tempting to exchange money with the random guy outside the bank or the people standing around at border crossings. Don't! You may think that they have better rates than the bank, but they're usually scammers. Best case scenario, you get a bad exchange rate, worst case ... you get completely ripped off.

8. Avoid Currency Exchange Booths

While not quite as bad as the hustlers on the street corner, currency exchange booths are the next worst thing and typically have horrible exchange rates, especially ones located in airports.

9. Exchange With Other Travelers

If you end up with a bunch of extra local currency at the end of your trip, consider selling it to another traveler for USD. You'll probably get a better rate and you can avoid all bank and conversion fees this way.

10. Always Pick the Local Currency

Oftentimes when you use your credit card abroad, the machine will give you an option to use your home currency. Don't do this. They will usually charge you a worse conversion rate than your credit card if you just use local currency.

11. Download the XE App

It's always best to know the exchange rate for the country you're traveling to. The XE Currency App is a handy little app will automatically update every day with the exact exchange rate.

How do you access cash when you travel — and avoid bank fees?

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This article is from Nick Wharton of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Don't Let These Expenses Spoil Your Retirement Abroad

Claire Millard — Wed, 06 Jul 2016 09:00:11 +0000

The relatively low cost of living in countries like Mexico, Thailand, and Spain makes them popular destinations for retirement. Your fixed retirement income goes further here, affording the possibility of a little luxury, as well as adventure in your later years.

Standard of living, climate, and culture are all massive draws, but retiring abroad can also come with unexpected bills. Take, for example, medical costs, taxes, inheritance restrictions, and house buying fees which are completely different to home. While the everyday cost of living might be favorable, these "one off' costs can stack up.

Here are some specific (and perhaps unexpected) bills to watch out for.

Assets and Visas

In order to get a visa as a retiree, you will need to demonstrate that you have the income or assets to support your lifestyle. Because it is assumed you will not work (you're retired, after all), the visa type may prohibit you from taking on employment to supplement your income — making your pension or other assets absolutely crucial.

The amount required to get a visa varies from location to location. For example, to retire to Thailand you must prove you have a monthly income of around $2,000. Although this might seem low to those of us living in Western Europe or North America, this income is double that of the average Thai.

If retirement in Mexico floats your boat, you will need to prove you can afford it. A temporary visa which lasts for up to four years requires you to have an income of just over $1,500 a month, or just over $25,000 in the bank. A permanent visa, on the other hand, means you need over four times that in the bank, or a monthly income of over $2,500.

Exchange Rate Woes

Wherever you're headed, if you draw income or pension in one currency, and are planning on spending in another, then you need to understand and make allowances for exchange rate fluctuations. If not, you might find yourself with a hefty bill to pay.

For example, if you are planning on buying a house in your new retirement location, and will have a mortgage outstanding on it in a local currency, your payment might change significantly because of the exchange rate. Add in the potential fluctuations in mortgage payments due to interest rate changes, and you might struggle to predict exactly what your housing bills will look like on an ongoing basis.

If you own property in your home country, one option is to mortgage that property, and use the cash to buy outright in your adopted country. This means that the mortgage you will be paying is in the same currency that you draw income in, removing one source of worry.

The Cost of Good Health

For something that is truly priceless, keeping in great health can be pretty costly. Because a trip to the hospital can be relatively cheap in many popular retirement destinations, many expat retirees prefer to pay out of pocket for their health care as they need it.

Paying for health care is a personal decision, and depends largely on your ease of access to funds, and your attitude to risk. Be warned, though, that in some countries such as Thailand, hospitals have been known to turn away people who cannot prove their ability to pay, either with ready cash or valid insurance. Carry a credit card on you if you choose not to invest in an insurance policy here!

Home Sweet Home

Buying a new home is seldom stress free — and doing it abroad is likely to create some unexpected bills and charges. Make sure you're very clear on the costs involved.

Across Europe, for example, house buying comes with a whole range of fees which vary from country to country, and quickly mount up. Throw in the additional costs of having documents checked by a notary, or translated by an official translator, and buying somewhere to live can be especially pricey.

It is well worth keeping up with the local news in the country you move to, as your liabilities don't necessarily end once the purchase is complete. Homebuyers in Spain have been pursued for tax the authorities deemed payable on property bought up to a decade ago, because of the high numbers of overseas buyers taking advantage of the massive slump in prices. You might not be able to change unexpected bills like these, but at least you can be forewarned.

Part of what makes life overseas exciting is the opportunity to gather new experiences along the way. However, some of these differences can make life that little bit more challenging, too. Many of the costs associated with retiring abroad are unavoidable — but by being aware in advance, you can better manage the bills as they come in.

There's no substitute for your own research. If you're thinking of building a life abroad for your retirement years, then get your finances prepared, so you can enjoy peace of mind.

Are you planning to retire abroad? What do you think — does the lower cost of living outweigh the risk of financial surprises?

This article is from Claire Millard of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Don't Get Taken: How to Evaluate an Exchange Rate

Claire Millard — Tue, 14 Jun 2016 09:00:12 +0000

Currency exchanges should be simple transactions, requiring only very basic elementary school math. Multiply a couple of numbers and you are done, ready to take your trip abroad free from worry.

But there are so many choices of exchange services — online, in banks, and at the airports — all offering slightly different rates and service packages. Not only is it draining to figure out which to choose, but it also makes it hard to know whether or not the price you are being charged to switch your hard-earned cash is fair.

Check out this quick summary guide to help you calculate and find a fair exchange rate. (See also: Travel and Money: Using Pre Paid Travel Cards)

Why Is Currency Exchange So Confusing?

Some of the confusion around exchange rates is hard wired into the system. Rates vary day by day — and minute by minute — depending on trades going on around the world. The range of factors that can influence an exchange rate runs from macroeconomic and political trends, to the quirks of individual high value trades. Concerns about the stability of a currency can cause it to tank, while some good news can see it shooting up as investors want to buy in.

Aside from the vagaries of the market, the other major factor influencing rates are the banks and exchange services, themselves. The rates on offer at your main street bank, when exchanging relatively small sums, are quite different from the rates that would be offered to a trader dealing on a daily basis in huge volumes.

And because different banks and platforms apply different percentage markups to the exchange rates that are available on the open market, the end result is that there are pretty much as many rates as there are banks. So amid all the moving parts, how do you know if the rate you have been offered is actually fair?

Do the Math

This is the elementary level bit. Let's recap a bit of your childhood math.

If you would like to change some money from dollars to euros, you will find the exchange rate, depending on the day and bank rate, listed something like this: 1 USD = 0.89EUR. This means that one dollar will buy you 0.89 euros. If your budget for your super luxury trip is $2,000, the calculation is as follows:

2,000 X 0.89 = 1,780

So your $2,000 will buy you €1,780.

Naturally, you can do the same math backward. If you know the amount in euros that you need for your trip, then you simply find the correct rate, which will look something like this: 1 EUR = 1.12USD. If you know you need €3,000 for your trip, then the sum looks like this:

3,000 X 1.12 = 3,360

And your trip will cost you the grand total of $3,360.

That's the easy part. But how do you know if the rates that are listed in your bank are actually good or not? Crack out the calculator again because there's more math coming.

Banks and the Mid-Market Rate

To know if the rate your bank has on offer is any good, you can compare it to the midmarket rate to work out the percentage markup they are adding for their own profit. Here's how:

Find the Mid-Market Rate

It is easy enough to find the live market rates for most currency pairings from Yahoo! Finance. Simply find the currency pair that you want to exchange between, which will be expressed something like this: GBP/USD, or USD/EUR.

Check the Bank Rate

The market rate you will find in the step above is not the same as the rate you can get from walking into the bank. This is because the market deals with huge trades, and offers favorable rates for volume. The actual rate available to you will depend on the amount you want to exchange, and other factors, like whether you want the money immediately, or can wait.

Pick a rate to compare. Let's say we are changing dollars to sterling, for a trip to London. The market rate we found is USD/GBP 0.68. However, the rate offered by an online exchange service is USD/GBP 0.65.

Do the Math

The markup applied by the online exchange service is the difference between the two rates — but you need to turn this into a percentage to compare it.

The difference between the rates is: 0.68 - 0.65 = 0.03

To turn this into a percentage, divide it by the market exchange rate and multiply by 100:

0.03/0.68 = 0.04411765 (X 100) = 4.41%

This is a real example, and shows the huge markup that some online exchange services charge — exactly why you need to watch out! In this case, the service applied a markup of 4.4% to allow you to change your cash — a hefty fee. But now that you know the math, you can quickly compare rates — and choose the service that offers the best value.

So What Do I Do?

Knowing that some currency exchange platforms are charging a big fee is one thing. More useful is knowing what to do about it, so you can knock it off the list of things you might be overcharged for on vacation. There will be a markup on the market rate, but keeping this as low as possible will mean you get more bang for your buck.

Research is your friend, especially if you have some time to observe the rates and get a feel for what the market is doing. Currency converters available online are the best way to keep an eye on the fluctuations in rate. If you have the luxury of time, then you can wait for the rate to improve before making your exchange.

The biggest threat to your hard-earned cash is the fact that many banks and platforms hide fees and charges in small print. So for example, a bank might claim to charge no commission — but the chances are that they adjust their rate to mean you pay over the odds for the currency. Or you might find that the package of "premium" perks, like having your cash delivered securely to your home, or being able to sell your spare change back to the bank, turn out to be more expensive than they are worth. Be really clear on the services you need, and you won't be tricked into thinking a package is a great deal when it is not!

How do you make sure that you get the best deal possible when exchanging your cash for vacation? Let us know in the comments.

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This article is from Claire Millard of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Sinking Dollar: This Time on Purpose

Philip Brewer — Fri, 15 Oct 2010 13:00:05 +0000

The Fed wants to keep the inflation rate up around 2%, simply because their efforts to boost the economy only get traction when they can push interest rates well below the inflation rate — something that's tough to do when the inflation rate is as low as it's been.

Normally, it's no problem to produce inflation: The Fed just creates some additional bank reserves. The banks respond by lending more money to businesses and consumers — who spend the money. That extra money out in the economy buying stuff is inflation. Rising prices follow directly (unless production is growing even faster than the money supply).

Just lately, though, the Fed has been stuck. A lot of businesses and consumers can't borrow, because they can barely service their existing debt. The ones who could borrow don't want to. And many banks have a balance sheet that's too shaky to support much lending, even if they can find a customer who's both willing to borrow and able to pay the debt back. The extra bank reserves just sit there.

But it's looking like the Fed has found a channel to produce the effect it wants: the exchange rate.

You can see in the graph above the two recent dollar lows — one in the early days of the recession and then another in the early days of the recovery. Just lately the dollar has been plummeting again. That's inflation too. In fact it is the very definition of inflation, which is the money becoming less valuable. (Rising prices are merely the symptom.)

Weakening the Dollar

Normally, the Fed (and the Treasury) like a strong dollar. It's good for consumers — a strong dollar means that imports are cheap. It's also good for most businesses. Exporters don't like it, because a strong dollar makes their goods less competitive overseas. But because the US imports so much of its fuel, a strong dollar is a win even for many businesses that export a lot of what they produce.

At the moment, though, the stars have aligned such that there's a lot of support for a lower dollar. That gives the Fed the opportunity to produce the inflation it wants — by weakening the dollar overseas.

Fed officials have been talking about "additional accommodation" and "further purchases of longer-term Treasury securities" for some time, and the minutes of the most recent Fed meeting show that they've been thinking about it for weeks. Judging from the hints so far, it looks like the Fed is going to buy a few hundred billion dollars of longer-term Treasury securities over the next few months. That will produce some inflation in the usual way (even though, as described above, that channel is mostly blocked). It will also push down longer-term rates, which has the knock-on effect of making the dollar less attractive to investors who want to hold bonds. That may make a few businesses and consumers a little more able and willing to borrow and spend. It also makes it less attractive for foreign holders of bonds to hold bonds in US dollars. (That's why the dollar has been dropping so fast just lately.)

And it's that falling dollar that's the real channel for this effort to have its effect. A less-valuable dollar is exactly what the Fed is trying to produce. That will lead to rising prices (initially for imports, but very soon for everything). Normally, its most immediate effect — rising prices for oil and other commodities — would make any effort to push down the dollar too unpopular to consider. But, just at the moment, there's something of a political consensus that we need to to push the dollar down. (Mainly, there's a general sense that we need to push the dollar down against the Chinese yuan, but that's very hard to do directly. However, it's very easy to push the dollar down in general. Then it will be somebody else's problem to get the details right as far as relative changes versus the yen and the euro and the Canadian dollar.)

What it Means, What to Do

It's pretty tough for Americans to protect themselves against a falling dollar.

Shifting some of your savings into some foreign currency is an option, but that's fraught for several reasons.

It negates the one big advantage of holding cash, which is that you can always use it to pay your bills. (I know exactly how many dollars I need to pay my rent from now until my lease runs out. I can only guess how many euros I'd need.)
It exposes you to exchange-rate risk. (If the dollar recovers sharply, you could lose a lot of money.)
It exposes you to other risks that you're probably not adequately familiar with — foreign institutions that might be credit risks and foreign legal systems that might or might not protect your interests — and to costs that might be significant compared to your investment return.

For most people, though, the loss of value in your savings is insignificant compared to the lost of value in your income (which is probably almost entirely in dollars). The only real way to fix that is to get some additional income in euros or yen or yuan — but that's not practical for most Americans.

If you're not an American, you're stuck facing the flip-side of this. Your currency is strengthening, which is great to the extent that imports will be cheaper, but bad to the extent that your (and your neighbor's) livelihoods depend on selling things to Americans.

There are two bright sides to this.

First, a falling exchange rate usually translates into rising prices only gradually. That's not true of commodities like oil, but for other goods, the manufacturers, importers, and retailers usually take most of the loss, at least for a while — in order to keep their market share and maintain good relations with their own suppliers and customers. So, expect the price of consumer goods to lag changes in exchange rates.

Second, for the reasons described above, the Fed isn't completely insane for wanting this. Rising inflation will let the Fed's policy moves gain some traction. A weaker dollar will boost U.S. manufactures. A recovery in the U.S. economy will yield benefits to everyone.

I don't think those benefits will exceed our losses, but they do exist.

After diversifying your income internationally (always hard to do, but worth attempting), your next best move (for Americans) is to find ways to reduce purchases of imported goods. Just using less is always a good idea — the less fuel you burn, the less you have to buy with your weaker dollars. Where you can't (or don't want to) reduce your consumption, source as much of what you buy locally as possible.

And, since those are all good things to do anyway, you can understand why producing a falling dollar isn't a mistake this time. They're doing it on purpose.

This article is from Philip Brewer of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

The sinking dollar, as viewed from overseas

Philip Brewer — Sun, 25 Nov 2007 13:39:39 +0000

To someone in the US, the decline in the value of the dollar has mainly made itself felt up to now in the form of increases in the prices of globalized commodities--everything from oil to nonfat dry milk. Consumer goods, even though many are imported, have only just very recently begun to show price increases. When you look at the picture as viewed from overseas, though, it's not as simple as just seeing the reverse.

The most straightforward effect of of a lower dollar is that stuff manufactured in the US would be cheaper overseas.

What, you may ask, is manufactured in the US anymore? Actually, quite a bit. The US still exports hundreds of billions of dollars worth of jet airliners, computers, telecommunications gear, and industrial machinery (together with parts for all those things). There are also thriving US industries selling things like chemicals and plastics. There's even good sales of consumer goods--especially medicines, but also toys, games, sporting goods, musical instruments, etc.

All that stuff, together with agricultural goods, has added up to some $850 billion so far this year. Which means, since those dollars are down from €1.00 for a dollar to just €0.67 over the past 5 years, all that stuff is on sale. (The dollar is down similarly against the Canadian dollar over the same period from close to $1.60 Canadian to about $1.00 now.)

So, on the one hand, with all that stuff on sale, you'd expect to sell more. And we are selling more, but only to a modest extent, due to the many delays and complications inherent in trade. (How many jet airliners that US companies sell depends more than anything else on how many were ordered over the past couple of years. Drug sales are mainly a function of the latest medical research on the best treatments for various conditions and how many people have those conditions.) Being able to get them with cheap dollars will change things around the margins, but even for things where price changes make an immediate difference in how much people want to buy, there are still manufacturing constraints, shipping constraints, and so on.

Even so, to the extent that US companies still make stuff--and that's a considerable extent, despite globalization and outsourcing--those companies can now sell stuff cheap enough that they can really compete.

What that means is that, where there's a direct foreign competitor, that competitor is now comprehensively screwed. Just like US companies, those companies have already outsourced as much as they can. Any work that hasn't been outsourced has only been kept because the skill set just doesn't exist overseas or national policy requires that it be kept. So, with US companies being able to pay their workers with dollars that are only worth €0.67, European, Canadian, and other manufacturers are facing some serious competition.

Of course, this requires that the US company actually be a competitor. This means, for example, that Airbus is in more trouble than, say, Toyota. (The yen is actually not up nearly as much against the dollar.)

To the small company that's providing goods and services for the local market, this isn't so bad. They were already competing with all the usual globalized suspects; giving the US an extra 30% edge doesn't help, but any market where it would make the difference has probably already been grabbed by some much cheaper global player.

For the major European and Canadian companies doing business in global markets, though, this is very bad news.

Of course, major companies have large tax bills and large workforces. A drop in business would lead to lower tax revenues for the countries. It would also lead to layoffs--layoffs of voters. Those realities are going to put serious pressure on governments to "do something" about the value of the dollar.

What can be done? Well, any central bank can hold the value of its currency down as low as it wants, if it's willing to buy an arbitrarily large amount of the other currency. That's what China has been doing for years now. The result, though, is inflation. The other central banks can join the game, if they want. They probably don't. In fact, even China is getting out, having decided that it's really got all the dollars it wants.

Beyond that, there will be political pressure brought to bear, but it's hard to bring that sort of pressure to bear on the US. A falling dollar makes Americans poorer in some sense, but not in ways that prompt ordinary people to demand better from their government. In the old days of the gold standard, the pressure would appear in the form of foreign sellers demanding actual gold instead of mere paper, the excess paper money that leads to a collapsing currency would be automatically curtailed. Nowadays, though, the pain of a falling currency is very much spread around--foreigners suffer about as much as Americans, and neither suffers so very much as to make the value of the dollar a major political issue.

Things will likely go on as they have, with people who have dollars trying to find something of value to spend them on. Once you've bought all the jet airliners, network switches, and soy beans that you want, you're pretty much down to buying stuff for investment. US treasury securities have been a popular choice, but US interest rates are now low enough that they wouldn't seem particularly attractive, even if they didn't face the obvious problem that your investment would still be in US dollars. US companies, with the credit problems stemming from the housing bubble and subprime loan debacle, should only be bought with a keen understanding of the underlying business. Still, there's plenty of other stuff worth buying in the US--land, for example. There's lots of that going on.

There's a lot of anxiety about this issue. The US dollar is important enough in world trade, that if it keeps going down, trade will become disordered. There are enough dollars in the hands of people all over the world--foreign governments and their central banks, major corporations, wealthy individuals--that there's a serious incentive for them to get their governments to do something. And there are plenty of theories about just how bad that something could turn out to be. Personally, though, I don't find any of the doom scenarios very compelling.

A complete collapse in the dollar is unlikely, because there's so much stuff you can buy with dollars that the currency will continue to have some value--it won't go straight to zero. Further, its slide in value is self-limiting because eventually both voters and the wealthy elite in the US will insist that it not fall further.

The individual outside the US is really a bit player in this. You're mostly not in a position to buy farmland in the US or hedge your future purchases against currency fluctuations. If you work for a multinational corporation that pays its workers in some currency other than the dollar, but which competes with companies that do pay their workers in dollars, you might want to be a bit worried about your job; even if jobs aren't lost, raises and promotions are going to be harder to come by. Beyond that, enjoy the occasional cheap thing you can get that's made in the US.

This article is from Philip Brewer of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Nonfat dry milk--no longer a frugal alternative

Philip Brewer — Mon, 05 Nov 2007 21:07:56 +0000

For more than thirty years, nonfat dry milk was a frugal staple. For things like baking and making yogurt, it was as good as fresh milk. Not many people wanted to drink the stuff, but a whole generation of frugal folks knew you could use it as an extender--make up a quart of nonfat dry milk and mix it with a gallon of fresh milk. (See Myscha's Powdered Milk Solutions for Dairy Lovers for other good ways to use nonfat dry milk.)

Since late summer last year, though, nonfat dry milk has been priced more like a gourmet specialty item than as the frugal alternative it used to be.

To put it in context, food prices overall are up 4.5%, dairy and "related products" are up 13.1%, but nonfat dry milk is up 104%! At that price, it's literally as cheap to use fresh milk as it is to use dry. (Data from the Bureau of Labor Statistics and Brian Gould, UW Madison.)

What happened? The market for nonfat dry milk is a global one. Just lately we've had one of those perfect storms of supply and demand changes that commodities markets see from time to time.

The major exporters of nonfat dry milk are the United States, the European Union, and Australia. Here are some of the recent shifts that have impacted the price of nonfat dry milk:

For the past five years, Australia has suffered a severe drought. It has cut Australian milk production by 20%; this year's production is down by a billion liters.
Over the past two years, the EU has been cutting farm subsidies in a way that encourages the production of cheese over nonfat dry milk, and has also ended all dairy export subsidies.
A July heat wave in California killed large amounts of dairy cattle--and California produces over half of the US's nonfat dry milk. Milk production in the US has only in the past couple of months climbed back to year-ago levels.
The weak US dollar has made US nonfat dry milk cheaper overseas, leading to higher US exports.
There's been strong US demand for milk proteins and strong world-wide demand for cheese. Meeting this demand has consumed milk that might otherwise have gone to making nonfat dry milk powder.

All that has added up to the recent spike in price for nonfat dry milk.

Having given all that attention to the market, I ought to also mention an important non-market force: government dairy subsidies. The change in the EU subsidy for nonfat dry milk is just one example. All these programs have complex effects on prices for dairy products. For example, in the US there's a support price of $0.80 per pound for nonfat dry milk. At current prices, that's not going to affect supplies, but in any market that has the kind of pervasive price support structures that the dairy market has, one has to be careful when analyzing sources of price shifts.

With US production returning to normal, I think we'll see nonfat dry milk prices begin to moderate, but as long as the US dollar remains weak and the drought in Australia continues, export demand will keep the price higher than its historical average.

(Thanks to Professor Bob Cropp at the University of Wisconsin-Madison for the lowdown on recent nonfat dry milk price shifts.)

This article is from Philip Brewer of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

The sinking dollar

Philip Brewer — Mon, 24 Sep 2007 22:23:45 +0000

It takes more than $1.40 to buy one euro today. It cost less than $1 as recently as late 2002. A Canadian dollar is worth just about exactly a US dollar--a parity not seen since the 1970s. Should Wise Bread readers care? If so, what should they do?

Higher prices for imported goods

The most obvious reason for US readers to care would be if a lower dollar led to higher prices for imported goods. When exchange rates make the dollar worth less, it seems obvious that it would take more dollars to buy all the stuff imported for sale in the US. The fact is, though, prices are generally set at what the market will bear already and those prices don't change very quickly in response to changes in the value of the dollar.

The most immediate effect of of lower dollar is higher costs for importers--higher costs that they largely can't pass on to consumers. The result of that is a profit squeeze on the importers. Faced with such a squeeze, they do their best to push back at both ends--trying to get lower prices from their suppliers and trying to push higher prices onto their customers. It's hard to know to what extent they're being successful--companies keep that sort of data secret--but there's been no sign of a spike in prices for ordinary imported consumer goods.

Higher prices for raw materials

The price of oil, quoted in dollars, has risen for most of the year. Looked at in euro terms, though, the change is less stark. A $60 barrel of oil at the end of last year would have cost €46 versus €57 for an $80 barrel today--a 22% change in euro terms versus a 33% change in dollar terms. The price of oil really is up, but not as much as the price in dollars might suggest.

Oil isn't the only raw material, of course. Prices of most basic materials--iron, gravel, lumber and so on--are all up in dollar terms. Like with oil, this is partially a real increase in prices, and partially just an effect of the falling dollar.

(Given the high oil prices, the price of gasoline has been surprisingly low, at least in the US. Enjoy it while it lasts.)

Expensive travel

If you're an American traveling overseas, you will definitely notice the difference--everything will cost more. Without the buffering effects of importers and retailers who are willing to sacrifice some of their profits in the interests of maintaining market share or customer relations, you're stuck paying the local price.

People whose income and savings aren't in dollars

A good number of Wise Bread readers live in countries other than the USA. Of course, where you live doesn't matter so much as where you earn your money and how it's invested.

To the extent that your wealth and income are in something other than dollars, the decline in the dollar provides some initial benefits--commodities priced in dollars are cheaper, as are goods and services from US sources.

Longer-term, though, the benefits are less clear. Those foreign manufacturers benefiting because many commodities are priced in dollars, are in many cases the same ones taking a profit hit to keep selling to US importers. For those products where the US is still an exporter, the US firms have a growing exchange rate advantage--they can cut their price to foreign buyers and still bring home just as many dollars as before. If you're an owner or an employee of a firm with a US competitor, the lower dollar may hurt as much as it helps.

Longer term

Last week's Economist makes the point that, "It is how steadily the dollar is falling that counts, not how swiftly." However much importers and retailers try to buffer the changes from the falling dollar, over the longer term the exchange rate matters, and there are plenty of doomsday scenarios that play out if people in other countries decide that they'd just as soon not hold dollars anymore. Even a small shift in the preferences of the people and institutions that have been lending money to US borrowers could push the dollar down very quickly.

The only way to retain those investments, if people start to move money out of the dollar, would be to raise interest rates sharply. But with the US economy already suffering from the subprime lending crisis and the resulting financial squeeze, the flexibility for the Fed to do that is minimal--indeed, the Fed just lowered interest rates last week.

What to do?

Since we don't know which way exchange rates will move in the future, it's hard to provide any slam-dunk suggestions. Having some international diversity in your investments is always wise, but moving out of the dollar just as it hits record lows is not necessarily the best strategy. (You're too likely to find yourself unprofitably buying high and selling low.)

If it were easy, probably the best thing to do would be to arrange to have some international diversity of income. It would be very nice if everyone had 15% to 20% of their income in foreign currencies so that it would grow when the local currency fell and vice versa--adding a stabilizing influence to household income. Sadly, that's not really practical for most people. Working for a multinational corporation provides a tiny sliver of the same benefits, but most of the upside will probably go to investors rather than employees.

Still, as long as you have your income in the local currency, you can at least take advantage of the buffering effects mentioned earlier. The worst situation is to be living in a country with a rising currency while earning your income from a country with a falling one. (The situation of Americans living abroad just now.)

For most Wise Bread readers, there's probably no benefit to taking any sudden or major actions just now. Maintain or gradually work toward an internationally diversified investment portfolio. Consider trying to develop some foreign-source income. Over the medium-term, arrange to live in the same country that the majority of your income comes from. If you can do at least a couple of those things, you'll be fine.

This article is from Philip Brewer of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: