CRPCˆ®, BFA, AAMSˆ®, AWMAˆ®Depending on your point of view, these are the best of times or the worst of times for the U.S. dollar. One of the rather surprising financial developments in recent years has been the significant weakness of the dollar, particularly in comparison to relatively new currency, the euro.
The good news ' domestic investors who put money to work in overseas stocks have seen a boost in performance when returns are translated from local currencies back into the dollar. In addition, exporters of U.S. products find they can be more competitive in other countries, as a weak dollar works in their favor.
The bad news ' Americans who want to travel to or make purchases in other countries where the dollar has significantly weakened will, in effect, pay a lot more for the privilege of doing so.
The trends that have taken place, particularly in the past few years, represent a significant change in the status of the dollar. When many European Union nations combined their currencies into the single euro in the late 1990s, a number of analysts wondered whether it would last.
Early on in the euro transition, the dollar, originally pegged at an equal value to the euro, gained strength. If you stayed in a Paris hotel in the fall of 2000 that cost $200, you would have actually paid, in dollar terms, approximately only $165.
Compare that to a visit at the end of 2007. That same $200 hotel would translate into about $290, a 75 percent price hike for an American in Paris.
The problem is even hitting closer to home. Just a few years ago, it would have taken only 64 cents to purchase one Canadian dollar's worth of goods. By the end of 2007, the exchange rate between the two currencies was almost even ' again, making travel in Canada more expensive for Americans now than it was earlier this decade.
The cost of studying abroad
Ironically, the cost of exchanging dollars to foreign currencies comes at the same time that more and more students are being encouraged to enrich their educational experience abroad. Those planning such an adventure need to keep in mind that costs are going up in many locations. Students should check with their financial aid office to see how dollars can be applied to overseas study programs, as that will become as critical as ever. It also may make sense to lock-in payments for specific aspects of the trip as soon as possible, to avoid so currency fluctuations.
Students and other travelers also may want to give consideration to alternative other destinations where the dollar won't bear as much burden. Some travel experts suggest seeking out places not typically at the top of the list for overseas travel.
Examples include destinations such as Central and South America, Indonesia, Morocco and countries in Europe that have maintained their own currency. For instance, the dollar goes a lot farther in Hungary than in other European nations that use the euro.
For those who still insist on visiting major destinations where currency trends have been less favorable, find ways to cut costs. Here are a few ideas:
Search out good deals on accommodations (such as hostels), car rental or rail tickets online Avoid exchanging more money than required, so you don't have to exchange it back and lose on both ends of the transaction Use ATMs to obtain local currency, as it tends to be the most cost-effective method Visit grocery stores to buy staples and snacks for food to avoid overspending in restaurants Good news for investors
While the dollar's weakness frustrates U.S. travelers and students, those who have been investing in overseas markets have greatly benefited from the trend. The simple point to remember is this ' after you put your money to work in overseas markets, if the dollar loses ground compared to the other currency, the value of your investment improves after it is translated back into dollar terms. This is one way those who plan to travel overseas can, at least indirectly hedge the potentially higher costs of their foreign country visits.
Of course, other factors come into play as well. The actual performance of the investments is another area to focus on. In recent years, overseas markets as a whole have generally outperformed U.S. stocks, even before the currency advantage was accounted for. Mutual funds tend to be a good way for most U.S. investors to tap the potential of overseas markets.
Including international investments in your long-term investment portfolio is generally considered an effective way for individuals to diversify.
One important point to keep in mind regarding currency trends, particularly in the short term, is that they are highly unpredictable. In fact, the level of uncertainty surrounding currency movements is one of the key factors contributing to the volatile nature of overseas investing. Currencies fluctuate in value each day, and it is difficult to anticipate what will happen a day, a month or even a year from now.
Consult a financial advisor for investment advice and the best methods for traveling or financing study abroad fees.
Ken Kriebel is a financial advisor with Ameriprise Financial in Bechtelsville PA. If you have any questions or if you would like a free consultation you can contact him at 610-473-8850.