An In-Depth Look at How Exchange Rates Affect the Way We Travel
Something many people forget to consider when deciding where to travel is the exchange rate between the origin country and the destination country. For many, that can be a costly mistake. You see, when asking travel experts and forex professionals, they all agree that exchange rates should play a more central role in our decision making when it comes to choosing where to travel.
In order to try and figure out what the actual relationship between exchange rates and travel trends are, we turned to the forex expert and co-founder of BullMarketz.com, and this is what he had to say.
Exchange Rates and Tourism
Most people would agree that there is a clear connection between exchange rates and the value of a destination. The weaker the currency is at a destination compared to the currency from where the traveler comes from, the higher value the destination holds for the traveler. It’s a pretty simple equation.
A good – and very simplified – example of how this works is the correlation between the USD and the EUR.
For the better part of the past couple of years, the USD has strengthened its position against the EUR. Naturally, this has had an impact on the value for people traveling between the two regions.
Since every exchange rate is based on two variables, two situations are created when the USD becomes stronger against the EUR.
For the American traveler, it has become more affordable to visit Europe since their currency is stronger against the destination currency. In other words, American travelers get more bang for their buck in Europe today than they did a few years ago. At the same time, European travelers are having to pay more to vacation in the United States than they did a few years ago.
This simplified example is only a small part of how exchange rates affect the way we travel and to better understand the relationship we’ll have to take a look at another measurement.
The Visitor-Weighted Exchange Rate
In the travel industry, there is a commonly used concept called the visitor-weighted exchange rate. This concept is a measurement used to calculate the impact an exchange rate has on the actual flow of tourists to a certain region. Compared to the example I used above, the visitor-weighted exchange rate takes more variables into account, meaning it produces more accurate results.
In addition to measuring the estimated flow of tourists, the visitor-weighted exchange rate also measures the relative strength of a given country’s currency in relation to their tourist market. In other words, the visitor-weighted exchange rate can be used to calculate how the flow of tourists to certain economic regions is likely to develop as well as how the exchange rate in those regions is affected by the flow of tourists.
Obviously, access to this knowledge provides an incredible range of opportunities for the tourist industry. Not only does it allow them to estimate the popularity of certain regions but it shines a light on how the popularity of those said regions will affect the exchange rate between other currencies.
Today, the tourist industry uses these variables on a daily basis to find new destinations to focus on and to figure out where and when to offer discounts.
Exchange Rates and Tourist Spending Habits
The visitor-weighted exchange rate can also help companies in the industry estimate how much tourists are likely to spend in certain regions. According to a recent study done by Tourism Australia, exchange rates have a modest impact on tourists’ decision making when planning a trip but a severe impact on their spending habits while actually on vacation. What this means is that companies can estimate how much they’ll make from the flow of tourists traveling to a region using the visitor-weighted exchange rate.
What I want to emphasize is that the relationship between exchange rates and tourist popularity has never been more important. Therefore, it’s time that the tourist industry and, more importantly the tourists themselves, start taking the relationship more seriously.
The next time you’re planning a trip abroad, try to see if you can figure out the value of a possible destination by evaluating the exchange rate between your currency and the currency at the destination. Also, try to look at how the travel industry is selling certain areas and if there is a correlation between the currency exchange rates and, for example, airline offers and prices.
Moreover, economists and even forex traders should try to evaluate the impact of visitor-weighted exchange rates on future exchange rates in certain regions. In fact, in my opinion, this concept is an often overlooked and quite powerful technical indicator that forex traders should consider using.