Un­der­stand­ing the dy­nam­ics of Dy­namic Cur­rency Con­ver­sion

Business Traveler (USA) - - CONTENTS -

What you don’t know about the dy­nam­ics of Dy­namic Cur­rency Con­ver­sion could cost you when it comes to spend­ing abroad

When you are pay­ing for some­thing abroad, some­times you are given the choice of ei­ther pay­ing in the lo­cal cur­rency or hav­ing the trans­ac­tion take place in dol­lars us­ing your credit or debit card. What should you do?

The ad­van­tage of pay­ing in dol­lars is you can im­me­di­ately see what the item will cost. The dis­ad­van­tage is that it might turn out to be more than you would have paid in the lo­cal cur­rency.

When you pay in the lo­cal cur­rency, as well as tak­ing into ac­count the rate of con­ver­sion as ap­plied by your credit or debit card provider, you may also have to pay a for­eign trans­ac­tion fee, which will then be added into your costs.


When you buy some­thing (or with­draw cash) abroad in the lo­cal cur­rency, it will be sub­ject to the ex­change rate the banks ap­ply and, in ad­di­tion, a for­eign trans­ac­tion fee will prob­a­bly be levied. This fee will de­pend on the card you are us­ing. (Some cards do not charge fees for for­eign trans­ac­tions, although this may be part of a lim­it­ed­time pro­mo­tion or the card may charge an an­nual fee.) Both the trans­ac­tion in the lo­cal cur­rency and the for­eign trans­ac­tion fee will be con­verted into dol­lars based on the ex­change rate the day your trans­ac­tion was pro­cessed. The ex­change rate can fluc­tu­ate day to day de­pend­ing on sup­ply and de­mand in the cur­rency markets.

The two dol­lar amounts are then added to­gether and di­vided by the orig­i­nal cur­rency pay­ment amount to work out the ap­pli­ca­ble ex­change rate. Sim­ple, huh?


For ex­am­ple, you travel from the US to, say, Paris, and buy some­thing nice for your sig­nif­i­cant other back home. You spend €100 us­ing your credit card. On the day the trans­ac­tion is pro­cessed, the daily ex­change rate is €1 = $1.16074. So your pur­chase is con­verted from €100 to $116.07. In ad­di­tion your bank charges you a 1.60 per­cent trans­ac­tion fee on the $116.07, which comes to $1.86. Add to­gether the pur­chase and the fee, for a to­tal of $117.93, and then di­vide that by the orig­i­nal €100 pur­chase amount to work out the new ex­change rate (which in­cludes the for­eign trans­ac­tion fee) – €1 = $1.1793. Your credit card state­ment will sim­ply show the orig­i­nal charge and this new ex­change rate.


Dy­namic cur­rency con­ver­sion is the term used for pay­ing in your own cur­rency, dol­lars. Pay­ing in dol­lars makes the price you’re pay­ing clearer and means you don’t have to pay the for­eign trans­ac­tion fee (1.60 per­cent in the ex­am­ple above). But the re­tailer may still be charg­ing you a con­ver­sion fee, and the ex­change rate – set by the re­tailer – will al­most cer­tainly not be as com­pet­i­tive as the ones set by Visa or Amer­i­can Ex­press – so pay­ing in dol­lars could end up cost­ing you more – in some stud­ies as much as 10 per­cent more.


Check the cur­rent ex­change rate on credit cards, which is re­set daily by Visa or Amer­i­can Ex­press. Fail­ing that, just say no – and in­sist on pay­ing by card in the lo­cal cur­rency. You will still pay the rate of the day plus the for­eign trans­ac­tion fee (un­less you have a card that waives this fee, such as the Cap­i­tal One Ven­ture Re­wards Card or Chase Sap­phire Pre­ferred), but you will not be blindly shelling out even more for what is a sub­stan­tially worse ex­change rate.


It’s a scam when you’re not given a choice to pay us­ing it; you have the right to ask! For in­stance, when set­tling the bill in a restau­rant, check that the con­ver­sion has not al­ready been made when the point of sale ma­chine has rec­og­nized your card as “for­eign.”

You can in­sist on pay­ing in the lo­cal cur­rency, no mat­ter what the re­tailer, ho­tel or restau­rant says, but you may later see a voided trans­ac­tion on your bill.

Fur­ther, it is of­ten a scam be­cause it re­lies on “knowl­edge asym­me­try” – namely that we are un­able to eas­ily and quickly as­sess the over­all ex­tra cost of pay­ing in dol­lars rather than the lo­cal cur­rency. To learn more: busi­nesstrav­eller. com/fo­rums/topic/dy­nam­ic­cur­rency-con­ver­sion.

Just say no – and in­sist on pay­ing by card in the lo­cal cur­rency

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