Watching the Euro (slip through my fingers)

Sometimes currency conversion can be kind to Americans, other times not so much. One of the major factors in planning a European trip is accounting for the potential for the Euro to increase it's value against the United States Dollar (USD). Of course none of us are professional currency speculators or else you probably would not be reading my blog, you would be paying someone else to do it for you. I digress, for those who do not have a background in financial planning I will share my personal strategy that usually works out favorably.

When I'm sitting down defining all of my costs, I split out the items that are in USD (airfare, parking, trip insurance, and pet boarding) from those in Euros (lodging, transportation, sites, estimated daily spending, and meal allowance). I then identify the highest historical value of the Euro against the USD in the last 5 years (see Yahoo! Finance's Euro to USD 5yr Conversion Chart). You can also check on how the USD is performing against the Euro by entering "Euro to USD" into a search engine. This will result in a conversion value that indicates how much a single € will cost you in USD. For example, at today's rate, €1.00 costs $1.41824 ($1.42).

Using this number, it is possible to calculate the cost in USD for your Euro specific items. When it comes time for your trip, look up the actual value of the Euro to USD and recalculate your Euro specific costs. Unless a major devaluation of the USD has occurred, you should be in a position where your actual Euro specific costs are less than or very close to your previously estimated Euro specific costs.Let's setup an example that demonstrates this process. Assuming you are departing today, confirm the actual costs using the following values:

Estimated Euro Specific Costs:  €5000
5 year maximum conversion rate: €1 =  $1.57 (from July 7, 2008)
Estimated Euro Specific Costs in USD:  $7850
Today's actual conversion rate:  €1.00 costs $1.42
Actual Euro Specific Costs in USD: $7100
Difference (between estimated and actual) in USD: $750

This means, if you planned for the worst case scenario, you would have been able to over compensate leaving  an additional $750 to spend or bank. Of course, this strategy is not flawless, it is possible that unforeseeable events could upset the balance of the currency market and the cost of each Euro could increase above historic levels. If the differential is important to you, I would recommend checking in on the conversion rate from time to time (at least every month) to get an idea of the rate fluctuation.

Another thing I  like to do is compare the cost of purchasing an activity/tour in Euro's directly from the vendor or supplier versus purchasing through a third party such as Viator. Viator's offerings tend to fluctuation based on the value of the Euro and the demand for the specific activity. So when it comes time to buy, I will do an on the spot comparison to determine which of the two is cheaper. Sometimes you can also find a discount code for Viator that makes it a better deal, even when the Euro is down. Hopefully, these strategies will save you some money, like they have for me.