4 Reasons that currency drops don’t really make vacations cheaper

BoracayBeachTreesOne of the main missions here at Price of Travel is to help people estimate their travel budgets in any major city around the world. Currency exchange rates are one of the big factors in how prices change from one year to another, but they rarely have the positive effect we might assume they would. Particularly when you are visiting developing countries, which is where most of the big currency swings happen, the average tourist probably won’t even notice.

As someone who studies worldwide travel pricing and exchange rates, I would love to report that careful consumers can save big money by focusing on destinations with weak currencies. But the reality is, that doesn’t work at all. Check our World Backpacker Index for 2014 for typical costs in over 120 cities, and the cheaper countries are cheap for reasons having nothing to do with exchange rates.

Countries where exchange rates make at least some difference

The rest of the article below mainly deals with cheaper countries with exchange rates that can move around a lot. Costs on the ground can become cheaper or more expensive when going between the biggest economies when exchange rates move.

Countries where exchange rates matter at least a bit

  • USA, Canada, UK, Eurozone, Switzerland, Japan, Australia, and New Zealand.

If you are going pretty much anywhere else, currency fluctuations don’t really make things cheaper for holidays at all. Here’s why:

1 – Airfare prices follow their own mini economy

IcelandAirviewUnless you happen to be traveling to a country that neighbors your own, chances are that the airfare there and back will be one of the biggest expenses of your whole trip. Unfortunately (or fortunately, as the case may be), airline tickets operate within their own mini economy that is mainly based on supply and demand rather than local prices.

Virtually every airline buys or leases its planes in US dollars or euros, and jet fuel is also priced in USDs around the world. The only local expenses are crew salaries and some food, and if a currency drop makes those slightly cheaper for airlines, the airline will typically just use that new profit to try to stay in business rather than cutting fares by a few dollars each.

2 – Hotels almost all are priced in US dollars or euros

SriLankaHotelSuisseThis might be the most frustrating part. When you see that a country’s currency has declined by, say, 20% or even more, you also discover that almost all hotels actually price their rooms in US dollars or euros anyway. It’s usually only the cheapest 1-star hotels that maintain local prices, partly because most of their guests are locals anyway.

Any hotel that gets a good share of its business from foreigners will set prices in big currencies because it’s mostly about supply and demand anyway. In other words, they set room rates as high as they can in order to fill the most rooms at the highest total rate. They know tourists still have the same amount of their own money, so there is no real pressure to lower room rates.

This is even more true in luxury hotels and international chains, which are generally built with loans and financing based on US dollars. They have to be repaid in dollars, so there’s no way they’d risk losing money if a local currency drops. Generally speaking, the nicer the hotel, the better chance it will set rates based on dollars or euros.

3 – Many tours and even souvenirs are also priced in dollars or euros

TurkishViagraMarketSimilar to the hotel situation, tour operators even in developing countries will usually price their products in big currencies. Not only does it prevent them from losing money when their currency goes down and their fuel prices go up, but it’s generally easier for visitors to process that a day tour is US$15 instead of 315,600 Vietnam Dong or 183,450 Indonesian Rupiah.

It’s also a bit shocking and sometimes disappointing to find that most souvenir sellers, even the ones hassling sunbathers along beaches, will price their wares in dollars or euros as well. For one thing, they are all specialists in getting the highest price possible from each buyer, so even if their costs go down a bit, that doesn’t affect the demand at all.

If you want a t-shirt that says “Good Morning Vietnam!” in Hanoi, they are going to ask for US$5 (rather than 105,200 Vietnam Dong), and only after you agree on a price will they convert it into local currency so they can make change.

4 – Currency drops often come along with local inflation

HappyPlaceRestaurantPuriSo even with all the bad news above, you might still assume that local food, and especially street food, will get cheaper through a declining currency. Sometimes it does, but very often those currency losses directly lead to inflation in food and fuel prices. Since petrol is priced around the world in US dollars, it automatically gets more expensive when a local currency drops.

Fuel price hikes also contribute to food price hikes because shipping is so much of the total. For example, the Indian Rupee has declined by over 30% in the last few years against the USD and Euro, but prices for things like rice and onions have gone up even more over the same time. So even street vendors have to raise their local prices when their ingredients go up in price, and local customers have no choice but to go along with it as well.



2 Responses to “4 Reasons that currency drops don’t really make vacations cheaper”

Tim L. says:

Only one of these is true for people who are independent travelers rather than quickie vacationers who book everything in advance.

2) Budget and locally owned hotels are NOT priced in dollars or euros in many cheap destinations, including Mexico, Guatemala, Nicaragua, Thailand, Indonesia, Vietnam, India, Nepal…shall I go on?

3) This is not true in ANY of the last dozen countries I’ve been to on three continents. Where do you go shopping—at the Intercontinental Hotel gift shop?

4) There’s generally a 3-6 month lag for inflation to take effect in most nations. In Mexico, for example, prices have barely budged as the exchange rate has gone from 12 to 13 and they’re lagging way behind the rapid devaluation in Argentina. This is not true for any country with fuel subsidies: “Since petrol is priced around the world in US dollars, it automatically gets more expensive when a local currency drops.”

 

    Tim L.,

    I’m a fan of your book and blogs, but it seems like we’ve been having very different experiences lately. The Asian countries on your list are all examples of where I’ve seen most hotels list prices in USDs. I spent 4 months in India not long ago and the only places that didn’t quote in dollars were the 0-star places or those that get almost no tourists. In Turkey (where I lived for a year) they all list prices in Euros so rates haven’t budged as the currency has come down.

    For tours it’s the same thing, and for shopping I’m talking about souvenirs in “cheap” countries where there are no price tags and the seller asks for as much as they possibly can get, no matter the exchange rate. This happens around the world, and the InterContinental is probably one of the few places where it doesn’t happen. In shopping malls, it’s true that local fashion (with price tags) can get cheaper, but international goods are all priced in USDs as well.

    You have a point about countries with fuel subsidies, but there are plenty of places without them. Food in countries like India and Argentina does go up in price quickly once the suppliers know they can’t replace it at the same cost. -Roger

     

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