When 21-year-old Neel Bhuta spent a semester abroad last year, the New York University economics and history major carefully studied the international cost of a beer.
In Prague, he considered a $2 mug overpriced — compared to elsewhere in the Czech Republic.
“One of the reasons I chose to go to school in Prague was that it was not tied to the euro and was going to be a lot cheaper,” Bhuta said. “I mostly stuck to visiting Central and Eastern European countries because my dollar would go so much further.”
When he ventured further afield, he got proof he’d chosen wisely. His tab for one beer in Rome: $8.
Blasted dollar. It got us so far for so long. The world was our mall and travel was cheap.
But it couldn’t last forever. In two years the dollar has wilted drastically against currencies worldwide.
During the last week of July, the euro reached an all-time high against the dollar and the British pound reached a 26-year peak. At the same time, the dollar sank to a 22-year low against the New Zealand dollar, an 18-year low against the Aussie dollar and a 30-year low against the Canadian dollar.
Bad days for the beleaguered buck. The outlook isn’t any better for Americans planning next year’s vacations. They’re going to have to be more resourceful than ever to find the world’s remaining bargains.
“Over the next few years the dollar will continue to go down. The question has just been how fast and how soon?” said Kenneth Rogoff, professor of public policy and economics at Harvard. “The bill is coming due for a decade of massive U.S. over-borrowing. Economists are predicting that a 20 percent further drop is likely in the next three to five years, and a 40 percent drop is possible.”
Why are we playing a dirge for the dollar? Blame an American economy that’s faltering while others prosper, the sub-prime mortgage crisis and the $800 billion we put on the nation’s credit card every year. Interest rates are steady here but poised to move higher in Australia, New Zealand and Britain, so foreign investors are chasing higher returns by investing there, not here.
Less demand for the dollar means a lower exchange rate. For Americans that means higher prices of crepes in France, paella in Spain and burgers in Canada.
“Within an economy, exchange rate is one of the most difficult factors to explore and to forecast,” said John Kester, chief of market intelligence in Madrid for the World Tourism Organization, a special branch of the United Nations. “The dollar to the euro is weaker than ever and, in the long-term, the weakness will go on because it reflects imbalance in the U.S. economy.”
So do we just stay home? American travelers who continue to book flights in record numbers from the U.S. say no. But the budget-conscious are planning better and making different choices.
“You can go to Colombia and get a steak dinner for $10 but you can hardly get a hamburger for $10 in Europe,” said Lauren Vaccarello, director of publishing for gocurrency.com, a Web site that combines currency conversion, exchange rate information and other financial information for travelers. “Americans tend to go to places that are ingrained in them, but they can get so much more for their money in other places, feel as if they’ve been on vacation and come home with money left in their pockets.”
Many people only consider the price of flights and hotels, neglecting to factor in costs they’ll face once they arrive, said Bill Ridgers, chief analyst for travel and tourism with The Economist Intelligence Unit in London. “Often they are shocked.”
One measure of what a traveler will spend in a country is the “Big Mac Index,” a light-hearted chart (part of which is reprinted here) that The Economist publishes annually to show purchasing power parity between the U.S. dollar and other currencies. While the price of a Big Mac usually is a good indication of general costs in another country, burgernomics has its aberrations. A Big Mac in Japan is relatively cheap for Americans — but not much else is.
Travelers unjustly limit their options, however, if they look only at how exchange rates affect their travel budgets, Ridgers said. They need to factor in local labor rates, cost of transportation, infrastructure and availability of natural resources.
Tokyo and New Delhi would be polar opposites in value, Ridgers explained. Big Macs aside, travelers would find Tokyo “horrifically expensive” because it has few natural resources, pays dearly to import food and has a wealthy population that can afford higher priced goods. Because land is scarce there, any construction is pricey. A better value would be India, where local labor is cheap, natural resources abundant and the middle class remains small.
“Just because a place has become more expensive doesn’t mean that it cannot still offer good value,” Ridgers said. “Costa Rica is on the U.S. doorstep, and regardless of what happens there, it will be half the cost of a U.S. holiday. The less wealthy a society is, the cheaper it will be for travelers.”
Central America and South America remain destinations where U.S. travelers still find great values. When Holli Hebl’s family visited her at the non-profit where she teaches in Guatemala this spring, the group of seven spent only $1,000 total (excluding airfare) over eight days for food, good hotels, shuttles and every tourist activity they imagined, including zip lines, touring Lake Atitlan and viewing the magnificent floats in Antigua’s Easter parade. Another family reported spending $30 a day (including buffet breakfast for four) for an oceanside hotel room in the historic Brazilian beach town of Paraty.
Between 2000 and 2006, air traffic from the U.S. increased 48 percent to Central America and 23 percent each to South America and the Caribbean, WTO’s Kester said. Many of the Caribbean islands use the American dollar or are closely linked to it, so the currency woes don’t affect prices there.
Those great, tropical deals, however, don’t necessarily translate to the touristy areas of the Caribbean. “The answer is simple supply and demand — much of the Caribbean is set up to be fairly exclusive, aimed at the upper end of the market,” Ridgers said. “Plus, the islands are quite small (limiting supply), and the two things together then push the price up.”
Americans cannot budget next year’s vacation based on today’s exchange rates, Vaccarello said, but they may consider some other factors. Watch interest rates in different destinations. If they increase, the currency soon will become more expensive. Countries tied even loosely to the dollar like China and Turkey will fluctuate only slightly.
For Americans, most of Asia is a bargain, especially countries with low labor costs such as Malaysia, Thailand and Vietnam.
When John DiScala, who runs his own travel Web site, johnnyjet.com, went to Malaysia earlier this year, he spent $104 for a night at the Ritz-Carlton hotel. Four employees assisted him with check-in, and he found a pillowcase in his room monogrammed with his initials. His 25-minute cab ride to the hotel had cost just $1.50. Compare that to the 10-block cab ride in Sweden this year that cost him $15.
“It’s crazy that more Americans don’t travel to Asia but I guess they’re not up to the 14-hour-plus plane trip and are afraid of the unknown,” DiScala said. “They think Asia is a world away.”
While Vaccarello monitors the world’s currencies daily and would personally love to visit the south of France, she knows her budget will only allow cheaper destinations. Perhaps she’ll wind up in Egypt next year, where friends recently spent only $25 per day — including hotel and food.
“Turkey and Egypt remain good values because they have the infrastructure developed to support tourism but their wage levels and costs of living are lower,” said Kester of the WTO. “Tourism is a way of developing those economies and alleviating poverty.”
Savvy travelers wanting to save money, Ridgers said, also should keep up with world events.
Consider that cheap steak dinner in Colombia — which most travelers might believe to be too risky a bargain. “Most people don’t know it is much less dangerous in Colombia than it was five years ago. The reality on the ground is much different from the perception,” he explains.
And then there’s Bali. After the 2002 and 2005 bombings, both in the same crowded nightclub area, people stayed away. But hotels and resorts elsewhere on Bali were virtually unaffected, and most were in areas unlikely ever to be targets.
“If you know the reality,” Ridgers said, “you can be slightly ahead of the game and get a good deal.”
For those travelers still hooked on Europe, countries not yet tied to the euro in Central and Eastern Europe remain more in control of their own currency and a better value. For example, the Czech Republic has been a member of the European Union since 2004 but won’t complete the process to adopt the euro until at least 2009 and, perhaps, as late as 2012, Vaccarello said.
“If someone is looking to go to the Czech Republic, I would definitely suggest going soon,” she said. “Once the Czech Republic adopts the euro, the days of 20 to 25 koruna beers [about $1 for 1 liter] will be gone.”
And where will that intrepid economics major from New York University, Bhuta, find the best beer bargain in the future?
“My friends are all graduating in May and want to travel together. Since Europe is so expensive, we’re looking at Morocco, Istanbul and Egypt,” Bhuta said.
“Spending a certain amount of money in Istanbul will allow us to live like kings for a week but spending the same amount in Paris wouldn’t let us get out and do much.”
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The Big Mac Index
Country In local currency In dollars
U.S. $3.41 $3.41
Argentina Peso 8.25 $2.67
Australia A$ 3.45 $2.95
Brazil Real 6.90 $3.61
Britain (British pound) 1.99 $4.01
Canada C$ 3.88 $3.68
China Yuan 11 $1.45
Czech Republic Koruna 52.9 $2.51
Colombia Peso 6,900 $3.53
Denmark Dkr 27.75 $5.08
Egypt Pound 9.54 $1.68
Euro area ~ 3.06 $4.17
Hong Kong HK$ 12 $1.54
Japan Yen 280 $2.29
Malaysia Ringgit 5.5 $1.60
Mexico Peso 29 $2.69
Poland Zloty 6.9 $2.51
Russia Ruble 52 $2.03
Singapore S$ 3.95 $2.59
South Africa Rand 15.5 $2.22
Switzerland Swiss franc 6.3 $5.20
Thailand Baht 62 $1.80
Turkey Lira 4.75 $3.66
Source: The Economist; July 5, 2007
