What is an Exchange Rate and What Does It Mean?

What Every Traveler Needs to Know About Exchange Rates

exchange rate board of currencies
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If you're planning on traveling abroad any time soon, you'll have likely come across the term "exchange rate". What is it? What do you need to know about it before you plan your trip? And how can it save you money on your vacation? All of these questions are answered below. 

A foreign exchange rate is the relative value between two currencies. In particular, the exchange rate is the quantity of one currency required to buy or sell one unit of the other currency.* Jump straight to today's exchange rate on Yahoo here or keep reading to understand what the exchange rate means to you.

In travel, the exchange rate is defined by how much money, or the amount of a foreign currency, that you can buy with one US dollar. The exchange rate defines how many pesos, euros, or baht you can get for one US dollar (or what the equivalent of one dollar will buy in another country).

Why Travelers Need to Know What the Exchange Rate Is

Before you travel, or while you're traveling, you need to know what the exchange rate is so you'll know how much your U.S. money is worth in another country. If a dollar isn't worth a dollar abroad, you can budget accordingly (the current exchange rate varies all the time, from "good" to "bad" [for you]... why the variation? Ask experts on war, politics, and finance), and now how much you're actually spending while traveling.

Here's a couple of examples of times where I wished I had looked up the exchange rate in advance. 

The first was while I was at the airport in Moscow, Russia.

I'd just arrived in the country and had accidentally forgotten to look up the exchange rate before I arrived. There was no free Wi-Fi at the airport and I didn't have a currency converter app on my phone. I therefore didn't have any idea about how many Russian rubles I should take out for my two days in the city.

 

I had estimated I'd only need the equivalent of around $50 for my time there, but when I was faced with a list of various amounts, I didn't know which one to select. I picked one at random, then later discovered I'd withdrawn $400 worth of rubles! 

The second incident took place in Mozambique. Yet again, I hadn't remembered to research the exchange rate in advance. I had to do the same thing again, but this time I managed to withdraw a whole $3 from the ATM at the airport. My taxi driver couldn't believe it when I attempted to negotiate my fare with him! 

That's why you need to know the exchange rate before you arrive in a new country. 

Sometimes it's easier to think about foreign currency in terms of US dollars. You know how much a soda costs in the U.S. Pretend you're buying one in France: is a soda in the Paris airport worth two euros? To know what you're paying for the soda in France, it helps to know how many U.S. dollars two euros represents.

Let's say the euro exchange rate is 0.825835. That means one U.S. dollar buys, or can be exchanged for, or is "worth" 0.825835 euros. 

Now, in order to find out how much two euros is worth in US dollars, divide 1 (as in one dollar) by 0.825835 to calculate how many US dollars one euro is worth in France: $1.21.

Therefore:

  • 1 USD = 0.825835 Euros
  • 1 Euro = 1.21090 USD

By using the exchange rate, you can see that $1 equals a little over .80 euros. Two U.S. dollars equals about 1.65 euros; two euros equals about $2.40 in US money. You're short. You need an extra forty U.S. cents to buy the soda, which costs $2.40 in US dollars in the Paris airport. (Thus proving that airport drinks are always spendy, and you've "lost" about 20 cents per U.S. dollar in the transaction because of the exchange rate, which favors the euro in this example [which is bad for your U.S. dollar]).

What to Know About Exchanging Money Abroad

Don't rely on street kiosks in another country to give you an accurate or completely fair exchange rate, and the absolute worst place to exchange your money is at an airport. Currency exchange places at the airport know that they don't have to do anything to attract travelers, so they slap a huge commission on top of every transaction, and if you're anything like me, you'll end up going to them and regretting it every time.

If you know what the rate is, having checked it online or at a bank, go ahead and change your money at a street kiosk, provided you can whittle the vendor down to a figure close to the current rate. It will never be as good as the deal the number you'll find online because the street kiosk owner has an advantage -- he's strategically located and open early and late -- think of the reasons you pay higher prices in a convenience store to understand why a street rate may be higher than that from a bank.

I recommend exchanging your money at a bank if at all possible, or shopping around to see which currency exchange kiosk offers the best rate. 

How to Find Out the Current Exchange Rate

Use an online currency calculator or go to a bank to find the current exchange rate; again, don't rely on street kiosks or storefront money joints to give you the best deal unless you already know what it is. Here are some helpful resources to bookmark before you leave:

 

This article was edited and updated by Lauren Juliff.