Q: I’m heading off to the US early next year for a major trip and was wondering whether I should buy my US dollars now while our dollar is above parity. Where should I buy them and can I maybe cover my time risk by having some sort of Australian account in US dollars until I go?

A: While we think the current $A exchange rate is extremely high right now, remember our dollar was regularly above the Greenback about 30 years ago. If you want the peace of mind of knowing how much foreign currency you will have to travel with, then by all means lock in the rate but you may also find that the $A resumes its rise.

But if you convert your $A now you are probably giving up potential interest earned in the meantime. Indeed the opportunity cost may prove to be higher than any potential loss from exchange rate movements. This problem is generally greater if the money would otherwise remain in an offset account against debt like a mortgage.

Bank accounts that hold the balance in a foreign currency such as US$ and Euro are available to Australians and are typically offered by the big banks. Generally they pay very little interest and charge regular monthly fees on top. The cost of holding these accounts can be more than holding cash in actual currency, so make sure you understand the fees involved. They are convenient for those who travel a lot to one country. Foreign currency denominated facilities are also offered by American Express and others.

When you’re converting currency, check the conversion rate or spread between currencies and also the fees or commissions involved in the trade. Shop around and compare the rates offered between several businesses. Convert only as much currency as you need to hold for the trip. For larger purchases, use credit cards. There are several quality apps available for mobiles that will let you calculate currency conversions en route, to tell you whether you are getting a fair deal.

This article was published in The Australian on 27 August 2011. A direct link to the article can be found here.

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