An American tourist in Europe no longer has to worry about the mental math of currency conversions. As of July 11, the dollar and the euro were at parity: one U.S. dollar equals one euro. (The euro has regained some of its ground since then, with a U.S. dollar now getting you 0.98 euros.)
But it’s not just the euro. The U.S. dollar has been strengthening against all other major currencies. Traders are flocking to U.S. assets, drawn by the U.S. Federal Reserve’s interest rate hikes and the relative safety of U.S.-backed assets amid the threat of a global recession.
A strong dollar is a boon for U.S. importers, who can now buy more goods from overseas, and for foreign companies doing business in the U.S.; their sales in U.S. dollars will convert into higher revenue in their local currencies.
But the strong greenback is also good for international travelers, since the U.S. dollars they take overseas will translate into more local currency. That increase in purchasing power means tourists have more local currency to spend on lodging, food, recreation, and shopping.
Where to go with a strong USD
Top destinations for American tourists are among the locations where the USD has rallied against local currencies. According to U.S. Customs and Border Protection (CBP) data, more Americans departed for airports in Canada, Mexico, and Europe than hubs in other regions in 2019, before the pandemic upended travel. Many Americans also flew to Japan, the top Asian destination according to CBP data. Other popular destinations, like Indonesia and Thailand, are likely to see increased travel as they lower their COVID travel restrictions—and as tourist hot spots like Phuket and Bali pivot to marketing themselves to remote workers.
In all those places, the U.S. dollar will go farther than it did a year ago. Americans looking to stretch their money should consider those destination, and the others below—keeping in mind a few caveats.
Currency conversions matter less for some popular destinations, like the Caribbean, due to the widespread use of the U.S. dollar in tourist areas. And China—another popular destination for American travelers before the pandemic—is closed off to U.S. tourists, due to the country’s strict quarantine rules for inbound travelers.
The strong USD travel boom
American travelers are likely to take advantage of their newfound overseas spending power this year. Allianz Partners predicted in June that U.S. travel to Europe would increase by 600% this year compared to 2021. The U.S. dollar has gained about 14% in value against both the euro and the British pound over the past year.
But there’s one destination beyond Europe that offers U.S. travelers an even more lucrative exchange rate: Japan. The U.S. dollar has gained 26.1% against the Japanese yen, the weakest major currency versus the dollar this year. Analysts blame the crashing yen on the Bank of Japan’s reluctance to increase interest rates in line with the U.S. (and the rest of the developed world).
Though if you’re considering a trip to Japan to take advantage of the weak yen, be prepared for some significant constraints.
Japan only allows a limited number of tourists to enter the country. Visitors must be part of a package tour, chaperoned “throughout the entire journey,” according to guidelines from Japan’s Tourism Agency. They also need to buy medical insurance, wear masks at all times, and avoid the “three Cs”: closed spaces, crowded places, and close contact settings.
Other Asian currencies have also fallen against the dollar, but not to the same extent as the yen. Asian central banks usually intervene in currency markets to stabilize their value of their currency, drawing upon vast foreign reserves to help prevent currency values from changing too radically.
The U.S. dollar has gained 11.7% against the Thai baht over the past year, yet has only gained 3.1% against the Indonesian rupiah—used in the remote work hotspot of Bali.
Watch out for travel inflation
A strong U.S. dollar may seem like an invitation for American tourists to splurge overseas, but there’s another economic force to consider: inflation. In practice, a 15.3% decline in the value of the euro doesn’t mean you can buy 15.3% more stuff. Rising prices—especially the cost of getting where you want to go—is likely to eat up some of the gains from a better exchange rate.
The cost of traveling is up 17.5% compared to a year ago, according to the U.S. Travel Price Index, calculated by the U.S. Travel Association. That increase is almost double the rate of U.S. inflation, most recently calculated at 9.1%.
Much of the surge, according to the index, comes from rising transportation costs. Motor fuel is up 60.2% from a year ago, while airfares are up 48.6% over the same period.
The cost of rental cars in Europe has increased three-fold three in some locations. One CEO of a rental car company told Bloomberg that he expected elevated pricing to remain “at least for the most part of 2023.”
Oil prices, which surged in recent months in the wake of Russia’s invasion of Ukraine, are driving some of these increased costs. Airlines and airports have also struggled to increase capacity to deal with the post-pandemic surge of travel, leading to thousands of flight delays and cancellations, long lines at airports, and lost luggage.
Airline staff are demanding higher pay and better working conditions, with some cabin crew and pilots going on strike as negotiations falter.
The disastrous downside of a strong USD
While a strong USD is good for American tourists abroad, it’s important to remember that a strong U.S. dollar is having disastrous effects in some parts of the world, particularly in economies that depend on U.S. imports.
The Sri Lankan rupee has lost 55% of its value versus the U.S. dollar over the past year. A plunging currency and spiking commodity prices have decimated Sri Lanka’s foreign reserves, leaving the country without enough money to import food and fuel and sparking protests that ousted the country’s president on Thursday.
Sri Lanka used to rely on tourism to bolster its economy and provide the foreign currency needed to pay for imports, but the number of tourists visiting the island nation cratered after terrorist attacks in 2019 and during the COVID pandemic. Tourists had started to return earlier this year after Sri Lanka lowered COVID restrictions for travelers, but the country’s economic crisis is now scaring off visitors, with arrivals falling by 60% month-on-month in June. The country welcomed just 32,000 visitors in June this year, compared to 147,000 in June 2018.
The U.S. dollar (USD) is one of the most valuable currencies in the world. The euro is the main rival of the U.S. dollar in international markets. It was worth slightly more in 2020. That has not always been the case, with the euro-to-dollar rate fluctuating over the years.
In general, more valuable currencies tend to be stronger. That's because weak currencies lose value in the long run. However, some strong currencies, such as the Japanese yen (JPY), are less valuable because of the effect of inflation that occurred decades ago.
The exchange rates below are current as of May 2022.
- The U.S. dollar is one of the most stable and strong currencies in the world.
- It's used as a reserve currency for global trade and finance.
- Still, the currencies of some countries are more valuable, meaning that $1 is worth less than 1 unit of the foreign currency.
- A more valuable foreign currency does not necessarily mean that the foreign economy is larger or stronger.
- Exchange rates are set by a variety of factors, including the amount of money in circulation.
As of May 2022, the euro (EUR) to U.S. dollar (USD) exchange rate was about 1 euro for $1.07. The U.S. dollar generally strengthened against the euro in 2020 and 2021. This strength makes European imports relatively less expensive in the U.S.
A weak currency is not always bad because it can help boost American exports. The European Central Bank (ECB), which sets monetary policy for the eurozone, has more independence from national governments than other central banks because it oversees the entire continent's monetary policy.
That independence helps keep the euro strong. However, it also contributed to the European sovereign debt crisis. During that time, some countries (such as Greece and Italy) found it difficult to enact specific policies (such as printing more money) to help stimulate their economies.
The Cayman Islands dollar (KYD) was set via a fixed peg at 1.20 USD back in the 1970s. That may seem like an easy way to make a currency worth more than the U.S. dollar, but it's not necessarily so.
A currency peg can be difficult to maintain when local economic conditions are poor and the U.S. is raising interest rates. The country's status as a tax haven helps to support the value of the Cayman Islands dollar.
Bank of England (BOE) policymakers generally have kept pace with developments in other countries over the past several decades. They've kept the pound more valuable than the U.S. dollar.
The British pound (GBP) was historically worth more than the U.S. dollar. However, it declined against the USD during much of the 20th century. This decline reversed during the 1980s, and the British pound regained its old advantage over the U.S. dollar.
Like the Cayman Islands Dollar, the Jordanian Dinar (JOD) has been pegged to the U.S. dollar at a higher value. The hope was that a stable rate of exchange would help to attract U.S. investment to Jordan.
It is crucial to remember that any country can peg its currency to the dollar at any value. However, the currency must keep its value relative to the U.S. dollar to maintain that peg. Jordan successfully did that during the first two decades of the 21st century.
Most major capitalist countries pegged their currencies to the U.S. dollar under the Bretton Woods System in the mid-20th century. In the early 21st century, many nations in the Caribbean and the Middle East still tied their exchange rates to the dollar.
Oman is yet another country that pegged its currency to the U.S. dollar at a fixed exchange rate (1 OMR to 2.60 USD). The Omani rial (OMR) has maintained its value against the dollar due to Oman's oil production and its historically tight monetary policy and financial restrictions.
Omani policymakers have generally restricted the money supply to protect the country against war and conflict in the Middle East. That has impacted the country's inflation rate. In addition, lending practices in Oman tend to favor risk-averse companies and business ventures.
The Bahraini dinar (BHD) was pegged to the U.S. dollar at a slightly higher value than the Omani rial. The Bahraini dinar's yearly average has remained close to its current exchange rate since 2011 despite the significant effect that low oil prices had on Bahrain's economy. Bahrain's inflation rate was also modest and relatively stable.
The Kuwaiti dinar (KWD) is often the most valuable foreign currency and it does not rely on a peg. It floats freely. Substantial oil production has helped to augment Kuwait's wealth and support the value of the Kuwaiti dinar.
Over the years, Kuwait amassed a significant sovereign wealth fund. The Kuwait Investment Authority manages this fund and helps to ensure that Kuwait remains prosperous.
Broadly speaking, the exchange rate for countries with free floating currencies is usually affected by the strength of a country's economy. In addition, though, exchange rates are relative, meaning they depend on the country with which you're comparing yours at any given time. So, economic conditions and policies (e.g., concerning inflation, interest rates, debt) in the respective countries can affect the exchange rate.
As of May 2022, one Canadian dollar (CAD) would get you about .77 U.S. dollars. Looking at it from the other way around, if you'll be traveling to Canada and need some local currency, you'd be able to get 1.28 Canadian dollars for just 1 U.S. dollar.
The U.S. dollar is considered to be the most powerful or strongest currency in the world. There are a variety of reasons for this. The U.S. economy and government are consistently stable and strong. The have been for a long time. The U.S. dollar makes up the majority of the world's currency reserves. It's a trusted currency and accepted across the globe.