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In the financial crisis, is Europe becoming cheaper for American travelers?
If one can justify talking about an upside to the financial crisis, it's that the dollar has strengthened considerably against both the euro and the British pound recently. That translates to this: Europe has become cheaper for Americans than it was even a month ago.In August, Grant reported on the dollar's rally. Since then, it's rallied more.
As I write this, 1 euro is equal to $1.35. As recently as this summer the euro had topped out at around $1.62.
The pound had also risen to nearly a 1:2 ration to the dollar this summer, and was right around $1.90 to the pound when I was last in London in August. Now, one pound is equal to $1.70.
Both are significant drops, though in real life it's not like the difference means you can tack on an extra night or two to your European stay.
Still, after a while you notice it. I use the euro every day, and it's nice hitting the ATM and getting a little extra (or to be more precise, not having as much come out of my American checking account).
The dollar stands to even grow stronger against these currencies, and here's why: Europe is getting its ass kicked by the financial crisis.
The US housing boom was nothing compared to the value real estate appreciated in places like Ireland, Spain and the UK. Europe is going to follow us into a recession, and will be forced to cut interest rates to stimulate economic growth, which drives down the value of their currency.
But here's the catch: Europe has to cut much more than the US.
The US' interest rates are pretty much as low as they can get (1.50%), while the European Central Bank's key rate is still up there -- 3.75%. Since Europe is lagging behind the US, it'll probably have to continue reducing its interest rates at the same time that the US stops cutting. That means the dollar is going to continue appreciating against the euro, pound and other currencies.
I'm careful to call that good news, given all the panic in the financial markets these days. But for American travelers heading to Europe this fall on long-planned trips, it's hard to argue that it isn't.
Filed under: Europe, North America
Reader Comments (Page 1 of 1)
edward Oct 13th 2008 6:59PM
jebus... do you have enough money to pay mortgage for your house? 90% of the Americans don't know if they will have their jobs tomorrow.
Joe Oct 14th 2008 6:07AM
Those were the good days, buying electronics in the big Apple (at the time an iPod 5.5G was 165€), checking the exchange rate days before a trip and thinking of what I could bring back from the US that was wildly expensive in Europe, example the GAP. Now, I might be able to convince my mom to come back. Who went into shock after seeing the credit card bills from that trip.
A lot of europeans are in for a rude awakening but it won't be as surprising as what went on in the US. Spain has been drowning in an oversupply of real estate, UK real estate was so overpriced at one point I don't think anyone was really buying, and Ireland has had dramatic growth and dramatic growing pains.
The US has cut interest rates as close to the bone as they can go. The ECB has plenty of room to maneuver, even though it will cut rates atleast it won't be anywhere near 0 or 1%. Keep in mind the US is also trying to dump $700 billion dollars of make believe money onto the economy to spur growth. While this might help the local economy it's going to be a disaster for the dollar abroad.