Bucking a Weaker Buck

How you can lock in today's exchange levels

You've booked your plane ticket, made hotel reservations, and located the vineyard that produces your favorite wine. But you may not have noticed that the U.S. dollar, after years of strengthening, is starting to fall--and that can upset vacation budgets. "People often don't plan for their money needs as carefully as they do for their touring needs," says Maria Mendler, spokesperson for Citibank. Now, some products make it possible to lock in the current value of the dollar. That way, you can protect against a further erosion of the greenback and its purchasing power.

Granted, it's not easy to predict the future of exchange rates. But with most economists forecasting more weakening ahead for the dollar against the euro, yen, and some other currencies, securing protection against a decline in the dollar might make sense.

True, the greenback has been strong against most other major currencies since the late 1990s. But with U.S. financial markets weak, foreign demand for U.S. stocks, bonds, and other assets has slowed this year--causing demand for the dollar to fall, as well. Unless foreign investors suddenly turn bullish, the dollar--which is down nearly 7% against the euro since early February--is likely to fall even more.

What can you do to avoid the prospect of encountering exchange-rate sticker shock overseas? The simplest way to freeze the dollar's value at today's level is to buy travelers' checks denominated in the currency of the countries you plan to visit. American Express (AXP ) offers travelers' checks in six foreign currencies, including the euro, yen, and Australian dollar. The day you place your order, you lock in an exchange rate and generally pay a 1% fee.

A better bet--especially if your travel is three or more months off--is to open a foreign currency savings account or certificate of deposit. That way, your money may earn interest until you withdraw it to pay for your Paris vacation or your son's junior year in England.

Unless you are a big customer, you won't find nondollar accounts at most banks. But you can find them at an online bank. Everbank (800 926-4922; www.everbank.com), a division of Wilmington Savings Fund Society, offers accounts in 20 currencies. Everbank also offers a good deal on exchange rates, which average about 0.75% more than the wholesale "interbank" rate that big banks pay. In contrast, American Express tacks a 2% fee on to the interbank rate for overseas credit-card charges.

To open a savings account at Everbank, you must deposit at least $2,500. The account won't earn interest unless it holds at least $10,000. Even then, you'll earn less interest than the meager 0.7% Citibank offers on regular dollar-based savings accounts. A euro account, for example, will accrue only 0.125%--or 0.5% for balances above $75,000.

If you want higher interest rates and will exchange at least $10,000, look into a CD. On three-month CDs, rates range from 0.01% on the yen to 10.25% on the South African rand. Generally, you can get a CD with 3-, 6-, 9-, and 12-month maturities. You may also be able to arrange for a customized CD to mature right before you depart. Plan to leave the money in the bank until the CD matures or you'll forfeit your interest. With a savings account, in contrast, you can take your money any time.

You can have the proceeds wired to a bank or hotel. But don't wait until the last minute, since wires take two days to clear. Alternatively, if you plan to pay most of your expenses with credit cards or cash from ATMs, convert your CD back into dollars before leaving. If the foreign currency has appreciated against the dollar since you bought it, you'll have more dollars to pay your bills when you return home.

These maneuvers won't do you any good if you buy a foreign currency that declines in value by the time you travel. But with all the downward pressures on the greenback, locking in today's prices for the dollar is a reasonable bet.

By Anne Tergesen

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