Question: My wife and I are planning on going to France next summer and have been saving money for the trip. But the exchange rate is making our dollars less and less valuable overseas each month. What is the best way to help preserve our buying power? Thanks, Pat, Lakewood, Ohio
Answer: I’m jealous. France in the summer is delightful. The food. The history. The scenery. Okay, enough of that reverie and on to your financial question.
As I’m writing this, the dollar is near a record low against the Euro. At the moment it doesn’t appear that the downward pressure is going to let up anytime soon. Factors include the weakening U.S. economy, low interest rates, and the reconsideration by a number of oil-rich Persian Gulf nations and a handful of dynamic Asian economies of their reliance on the dollar.
However, some Wall Street currency mavens believe that the Euro value has gotten way too high relative to the dollar, and there could be some narrowing of the exchange rate by the time you take your trip. Problem is, economists don’t have a good model for forecasting currency values. It’s anyone’s guess what the dollar will be worth by summertime.
First, I would plan on spending more in France. It’s simply going to be a more expensive vacation. Next, I’d consider taking out a hedge or insurance policy against the dollar going lower by putting some of the trip money into a short-term certificate of deposit denominated in Euros. For instance, Everbank of St. Louis, essentially an Internet operation that is part of First Alliance Bank in Jacksonville, Fla., offers CDs in a number of foreign currencies, including the Euro.
There are a number of other options, ranging from mutual funds that invest in overseas short-term money market type investments to exchange traded funds that concentrate on Euros. For instance, Rydex Investment offers an ETF that allows you to speculate on the appreciation of the Euro and the depreciation of the dollar. However, investments like this are risky.
Remember, you’re taking out an insurance policy so if the dollar improves against the Euro within your travel time frame, you’ll take a slight financial hit. Of course, if the dollar stays weak or even heads lower, the cost of your trip will go up a bit more.
Either way, I bet it will be a memorable trip.
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