Savvy U.S. travelers to Europe will seek out competitive airline fares, cut deals with hotels, and never forget to recoup the value-added tax on big-ticket purchases. But when it comes to their largest purchase, currency, they shrug sheepishly, feeling thoroughly at the mercy of foreign exchange markets and currency dealers.
It doesn't have to be that way. If you're planning a major European visit next year, consider locking up euros at their current exchange rate. There are now simple ways to buy euros and earn a modest yield by putting them into a money-market account or a bank CD that matures next June, say, when you're leaving for Tuscany. And you could save a lot if you splurge on jewelry, art, or property.
The euro certainly looks ripe for hedging. Since it was introduced at $1.16 in January 1999, it has fallen 27%, to 84.6 cents now. If the euro keeps falling, a hedge at today's price will cost you. But the currency's next big move might be up. This view is supported by the effort the major central banks made in September to resuscitate the euro after it fell below 85 cents. True, the central bankers have initially declined to intervene when the euro sank below 85 cents on news of the Middle East flare-up, and that could mean continued weakness for the euro in the short-term. But there could be an opportunity here. Analysts argue that central bankers want the euro higher. HSBC, the London-based global bank, expects the euro to reach parity with the dollar, or 100 cents, by mid-2001. Even if it strengthens from 85 cents to 94 cents between now and your trip, you'll save $1,000 on $10,000 hedged. You exercise the hedge by using the proceeds to pay off credit cards or wire the money to Europe.
STEPPING STONE. Local currencies, such as the French franc or Spain's peseta, will remain the everyday currency until 2002. But all 11 member currencies are locked into the euro at fixed exchange rates (table). So you can hedge euros, then convert to local currencies without a fee.
Here are several ways to establish a hedge. One is everbank.com (800 926-4922; www.everbank.com), a new Internet bank in St. Louis that offers accounts in a wide choice of European currencies. You can open a noninterest account with as little as $2,500. With $10,000, you can set up either a money market or CD account, both FDIC insured. Everbank's interest rate starts at 1.125% on euro zone money market accounts, and 3% on euro CDs. But you pay no fees--and exchange rates are only 0.75% less than the prime interbank rates that big institutions receive. Try getting that from American Express. AmEx, for example, adds a 2% surcharge on goods you buy in a foreign currency. AmEx also charges 5% at ATM transactions abroad, up to 5% on foreign bank notes.
Another approach is to set up a savings account in the euro or one of its constituent currencies. The New York office of Rome's Banca Nazionale del Lavoro (212 314-0242) will set up a conto estero (foreign account) in one of several currencies. BNL pays interest of only 1% or so, its exchange rate is 1.2% less than the interbank rate, and there's a $25 annual account fee.
For higher yields, look at International Assets Advisory Corp. (800 432-0000; www.iaac.com). A broker-dealer in Winter Park, Fla., IAAC will help you buy short-term euro-denominated bonds yielding as much as 5%. It charges a 0.75% commission and a $25 fee on sell orders, but its exchange rate spread is 0.33%. Account minimum: $10,000.
You don't have to worry about price fluctuations if you buy a bond below par that matures just before you need the money. It will pay off at par no matter what the market does. Example: British mortgage lender Abbey National has a euro-denominated bond maturing in July that's denominated in euros and rated AA by Standard & Poor's. It's trading slightly below par, with a 4.8% yield to maturity.
Sure, it's more fun to scope out the sights than calculate exchange rates. But planning for your currency needs now may allow you to spend more on what really counts--your vacation.