Image: Pound vs. dollar
Christopher Furlong  /  Getty Images
The British pound hit the two dollar mark recently, which means American tourists abroad will spend a pretty penny.
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updated 4/27/2007 11:07:07 AM ET 2007-04-27T15:07:07

When is a dollar not worth its weight in gold? When you're measuring in pounds.

British pounds, that is.

On April 17, the pound reached an exchange rate of $2 against the American dollar for the first time since September 1992. That means that your George Washington paper bill is worth about two George Washington quarters — or, put more directly, what costs you about 50 cents here will cost you a dollar in the United Kingdom.

Further, the dollar is tanking against the euro on the other side of the Chunnel, recently coming in at around $1.36, with analysts expecting the euro to surge again next week. All told, the dollar has lost about 52 percent of its value against the euro since the beginning of 2002. Ouch!

What's the cause? I'm no economist, but a recent surge in inflation coupled with our massive national debt and a severely troubled war effort are the most likely explanations, say most analysts.

Of course, this isn't MarketWatch, it's Traveler's Ed, and so we're more concerned with how the exchange rate will affect your next trip to Europe. Luckily, a weak dollar doesn't have to derail your European vacation — in fact, travel to Europe is expected to be up this summer — so let's move on to what this means to travelers, and more specifically what you can do about it.

1. Get cash from ATMs — at a bank
An ATM is your best option for a combination of a fair exchange rate and low surcharges and fees. At an ATM, you will likely pay a transaction fee, but in many cases you won't be paying a percentage on every dollar exchanged.

Video: Taking a pounding However, we should note that many banks are now applying fees to foreign transactions, usually in the 1-2 percent range. Over the course of your trip, you'll take a hit from these fees — but it will be nothing like the up to four to eight cents on the dollar that you can lose by choosing the wrong exchange desk. In most cases you'll get the best rate available; the pennies can really add up the more you spend (and you'll be spending plenty in Europe this year).

When using an ATM, you may want to take out more cash than you need immediately, as with each trip to the ATM you pay the fees and surcharges yet again. You'll want to balance this tactic against the risk of carrying too much cash, which can make you vulnerable to the criminal element that sometimes preys on travelers. A hotel safe might be a good hedge against this problem. For more tips, check out this feature on money safety.

You'll do well to avoid stand-alone, off-brand ATMs of the kind you can find stateside in the back of convenience stores and the like. These typically have the highest transaction fees; use an ATM from a reputable bank instead.

Finally, even when using a bank ATM, you will sometimes pay fees both to the bank that owns the ATM as well as your own bank. Whenever possible, use your own bank to get cash. Virtually all major banks have ATM and branch location services on their Web sites.

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2. If you absolutely must use a currency exchange counter ...
The following tips can help minimize the damage:

3. Use your credit card
Many of the benefits of using an ATM card also apply to your credit card, with the additional upside that transaction fees, surcharges, poor exchange rates and the like are a lesser evil in most credit card transactions.

However, this is one area in which all credit cards are not created equal. Many credit card companies have adopted fees for purchases made in foreign currencies, usually 1-2 percent. Choose the right card and you can avoid these fees; Capital One, for example, is one major credit card company that will not charge you these fees (at present, anyway). Check with your credit card company for their fee schedule on foreign purchases to figure out which card has the lowest surcharges, and then use that one for your overseas purchases.

Out on the road, also check the fine print to make sure that your hotel, restaurant or other outfit does not tack on a percentage fee on all credit card transactions to cover their authorization fees.

4. Watch for bargains on your daily bread (and other essentials)
While traveling in southwestern France in 2001, a perpetually frugal-minded traveling companion turned finding the best-priced petit dejeuner almost into a blood sport. It makes sense; a coffee and croissant are pretty much a coffee and croissant no matter how much you pay for them.

After dishing out a few days of constant ribbing for the habit, her travel mates realized just how much money they were saving, and the cheapie became a champion for the rest of the week.

Other simple shopping moneysavers: Buy staple and snack food at grocery stores; take advantage of the hotel breakfast, if included; buy a bottle of wine at the local package store and sip on your hotel deck; know the best cab route before hailing a cab; and ask at your hotel for tips on finding the best affordable restaurants.

5. Get rate quotes in U.S. dollars
Long before you travel, when you are booking your hotel, car rental and other non-flight essentials, try to get quotes in U.S. dollars — and pay in U.S. dollars whenever possible. This way there are no surprises when your credit card statement arrives and you find out you paid a lot more than your quick back-of-the-envelope estimate when calculating the exchange rate.

It can also protect you from variations in exchange rates; if you are market-savvy enough to believe you can predict the rate trend, you may even want to pay in advance, although this can be risky.

At the very least, you'll know exactly how much money you paid for your trip without waiting 45 days for your bank statement. You'll be more able to stick to your budget and avoid post-vacation sticker shock if you can both plan and pay in U.S. dollars.

With the boom in Web booking, many international hotels now offer guaranteed dollar rates to U.S. travelers; inquire at the time of booking.

6. Fly cash (and coin) light
Wait until you reach your destination before exchanging currency at the beginning of your trip, and spend the bulk of your foreign currency at your destination before you go home. This way, you won't have to pick up and then dump a lot of money at an exchange booth while taking losses both coming and going.

This is especially applicable to the piles of rattling coins you accumulate while traveling; good luck finding a place back home that accepts a bucket of euro tin and Queen Elizabeth heads in your neighborhood. Spend all your change on the way out, or at least stop at a bank and convert it to bills; you might actually get your money back someday if you do.

If you think this is no big deal, consider that a two-pound coin is worth four bucks in the U.K. — and pretty much nothing back home. That could be a lot of money clanking around in the bottom of your daypack.

7. Go into the tourism business at home
One likely result of the dollar tanking will be a surge of tourism to the United States by European travelers. If you're in the travel business here in the States, you might want to brush up on your British mannerisms (like taking a high tea at, say, half five) and foreign language skills — because if you're not going there, it's pretty certain they're coming here!

The Independent Traveler is an interactive traveler's exchange and comprehensive online travel guide for a community of travelers who enjoy the fun of planning their own trips and the adventure of independent travel. You can access our wealth of travel resources and great bargains here at www.independenttraveler.com, or at www.bargainbox.com.

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