How the power of the dollar helps your vacation budget

by Nupur Gambhir
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How the power of the dollar helps your vacation budget

After World War II, the U.S. dollar was established as the global currency, held by banks across the world. The widespread acceptance of the dollar has allowed for its relative stability while the United States became the world’s largest economy.

But the world is catching up. Countries like China, India, Germany, and Japan may even overtake the United States in economic contribution in the next 10 years. Is the emergence of other economies going to reduce the power of the dollar and make travel abroad more expensive for Americans?

What does the dollar buy abroad?

What your dollar can buy is measured by something called the purchasing power parity of a currency. This is determined by the conversion rate from the dollar into other currencies and prices in other places, which don’t just vary from country to country, but also city to city.

“The economy in Russia may be terrible, but Moscow is a very, very expensive city. ... In India, the economy may be doing well, but still, the cost of living is quite low. If you were only buying food, [and] you're in Mumbai … then the cost of living isn't that high. But if you want to go to a luxury hotel, that is not that much different than the hotel price in Paris,” says Fariborz Ghadar, founding director of the Center for Global Business Studies at Penn State.

For context, consider the disparities in the cost of living in the US.

“If you live in State College, Pennsylvania, you can easily live … comfortably with $50,000 a year. But if you live in Manhattan, that doesn’t even pay your rent after taxes,” says Ghadar.

While the dollar is strong, the foreign exchange rate won’t be the only determining factor of how much you pay abroad. Factors such as inflation, cost of living and the overall strength of a country’s currency impact how much you benefit from carrying U.S. dollars when you travel.

Learn how to make a travel budget and stick to it.

So how can you spend abroad?

The countries trailing close behind the United States as economic powerhouses — China, Japan, Germany and India — vary significantly in their purchasing power against the U.S. dollar.

Germany, like most European countries, uses the euro. Though all currencies change in value, the euro is worth more than the dollar as of Wednesday and the German standard of living remains high; the Indian rupee is exponentially weaker than the dollar and India has a lower standard of living.

While a dollar is worth less than a euro, U.S. purchasing power means a dollar buys more abroad. For example, according to the Economist’s Big Mac index, a Big Mac in Europe costs 4.12 euros, or $4.54 by Wednesay’s exchange rates. Meanwhile, it costs $5.67 in America.

Regardless of how the dollar converts, you can still get more bang for your buck when you go abroad to the world’s biggest economies — even if they’re formidable competitors.

The future of the dollar

We live in an ever-changing global economy. While the dollar is unwaveringly considered the global currency, China and India are expected to surpass the United States as the world’s biggest economies by 2050. What does this mean for the cost of traveling abroad?

While nothing is certain, people who earn, save and invest in U.S. dollars can be almost certain the U.S. dollar will retain its stability.

The dollar is used as a mediator between multiple currencies. According to data from the International Monetary Fund, U.S. dollars made up 62% of the foreign currency held in reserve by central banks. The U.S. dollar can endure global shifts because it’s the safest choice for governments and companies, and displacing it would wreak too much financial havoc.

“Forecasting the future price of any currency is extremely difficult, with the exception probably of the dollar,” says Stephen Nelson, author of Currency of Confidence. “The dollar is probably the only currency where … the band of uncertainty around its future value is fairly narrow. If you’re a governmental organization your transactions ….[are] so deeply established, switching is really hard.”

Even as the global economy and political sphere shifts, for now, people earning and spending in U.S. dollars can expect to reap the same benefits as they always have.

“Barring some financial crisis.. people who have dollar savings should feel relatively reassured that the dollar is not going to be displaced or collapse anytime soon,” says Nelson.

But there’s no guarantee the dollar will remain supreme. As emerging economies begin to eclipse the United States in economic power, could the global currency shift to the Indian rupee or the Chinese renminbi? It will take a lot, says Andreas Hauskrecht, professor of business, economics and public policy at Indiana University.

“It’s not only that your economy is growing, you have to establish your currency as an international key currency,” he says. “You need that it’s stable, that the inflation is low, and the central bank is independent.”

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Image: GraphicaArtis (Getty)