I recently received the following reader question:
“Andy, my wife and I are traveling to Eastern Europe and Paris in July and I wanted to see what your thoughts were on the US dollar and if I should exchange money now (to get Euros) or wait longer if the US dollar is going to strengthen. Thanks, Mike”
Good question. Its been a while since the US dollar – and the American tourist – has been the beneficiary of currency movements. But, the Greenback continues to strengthen relative to the 17-member Euro currency, which has been on a downward trend as concerns over European sovereign debt crisis and Greece’s uncertain membership of the Euro zone grows. The Euro fell to as low as $1.24, the weakest since its multi-year low in July 2010 of $1.18 following the first bail-out of Greece.
Other major currencies have also seen significant shifts against the Euro which has declined 2.1% this year against nine developed market counterparts. Along with the greenback, the Yen has risen to 6 month highs against the Euro. This has spurred speculation that the Bank of Japan could look at weakening the Yen again. The Yen has stayed relatively constant against the dollar over the last month, suggesting that most currency moves are driven by Euro weakness.
Most analysts are predicting further falls in the Euro, and a relative strengthening of the US dollar, as the credibility of and confidence in European policy makers wanes. Some are even suggesting that the Euro could reach parity with the US dollar by the end of summer. However this downward spiral could quickly reverse if there is more certainty and clarity around Greece’s exit. Further, new proposals to move towards a European-wide deposit guarantee system and common bond issuance could provide more relief.”
So to answer your question Mike, I do think the US dollar will strengthen some more over the summer as a European resolution doesn’t look like coming anytime soon. That being said, trying to trade or pick the future direction of foreign exchange is a tough ask. To play it safe, consider getting 50% of your planned budget now and then the remainder shortly before you travel. For everyday travelers, who will likely spend less than $5,000 during a trip, the currency movements will have not such a serious impact. If the Euro drops from it’s current $1.23 level to about $1.15, it will mean an impact of about $200 (assuming you changed the 50% earlier on at the higher prevailing rate). Not nice, but not enough to ruin your vacation I am sure.