Not only do countries have their own languages, they often have their own currencies. To name just a few, there are: Indian rupees, Mexican pesos, South African rand, Swiss francs, Turkish lira, British pounds, and Chinese yuan. You may see Chinese currency called renminbi (RMB) and wonder why. Just as "pounds" are units within British pound sterling currency, "yuan" are units within the overall renminbi currency of the Chinese Communists People's Republic. Smaller units of the yuan are the jiao (10 jiao = 1 yuan) and the fen (10 fen = 1 jiao). In every day "slang," Chinese people often refer to money as a "kuai" (piece), like the British would say a "quid" or Americans, a "buck."Within the European Union, euros have replaced the national currencies of countries such as France, Germany, Greece, Ireland, Italy, Portugal, and Spain. Euros also are the official currency of Andorra, Monaco, Slovakia, Vatican City, and several other countries outside the European Union. If students have never seen foreign currency, adults can pick up a TipPak (registered trademark) of coins and currency from Australia, Britain, Canada, Japan, or Europe at a local AAA office. Prior to an international trip, AAA is able to provide international travelers with more than 70 varieties of the foreign currency they will need on arrival to pay for taxis, tips, and other situations where credit cards are not accepted. Find out more at aaa.com/TravelMoney.
Foreign currency has a different exchange value in relation to the U.S. dollar and other currencies. Since many of these values float, or change, the amount of currency needed to purchase another currency can go up and down within a day. Therefore, experienced travelers keep an eye on currency fluctuations and convert their Travelers Cheques to just enough local currency for a day or two. In order to make quick calculations, travelers also try to learn the value of foreign coins that are similar in size to the coins of their own countries. The website, finance.yahoo.com/currency, provides brief descriptions of foreign currency concepts. This website also is an easy way to keep track of the changing relationships between the U.S. dollar, Japanese yen, euro, Canadian dollar, U.K. pound, Australian dollar, and Swiss franc.
An alumni magazine posed a clever foreign currency problem for its graduates. It said that a professional tennis player wanted to buy a diamond tennis bracelet for his girlfriend that was priced at 100,000 Swiss francs at the airport in Geneva. He was en route to a tournament in Spain, so he called the friend meeting him at the Madrid airport to ask the cost of a diamond tennis bracelet there. The friend said it was 40,000 euros. Rather than go to finance.yahoo.com/currency, the tennis pro saw that a copy of the International Herald Tribune was selling for 4 Swiss francs or 1.5 euros. He bought the tennis bracelet in Geneva, since at a 4 to 1.5 ratio, the bracelet should have cost 37,500 euros in Madrid, not 40,000.
Ratios are the basis for determining foreign exchange rates. During the first few years after the euro's introduction in 1999, the annual average rate of exchange for one U.S. dollar was about 1.25 euros.
$1 x
_______________ = _______________
1.25 euros 1 euro
1
x = _________
1.25
x = $0.80
Consequently, U.S. tourists realized their stronger dollars bought wonderful vacations in Europe and U.S. retailers took advantage of the opportunity to import European luxury goods. When one U.S. dollar purchased 1.25 euros and one euro was worth only $0.80 in 1999, a U.S. tourist paid $160 to purchase the 200 euros needed to stay in a European hotel room priced at 200 euros. By 2008, however, one U.S. dollar purchased only 0.64 euros, less than one euro. At that point, the purchase of European goods and travel to Europe grew prohibitively expensive. A U.S. tourist then had to spend $312 to buy enough euros for the same European hotel room that cost $160 in 1999.
On the other hand, as the value of the U.S. dollar declined, the United States became an attractive destination for European tourists. U.S. manufacturers also found that the weaker dollar helped them expand their exports. When 1.25 euros were needed to purchase one U.S. dollar in 1999, European consumers paid 25,000 euros to purchase the $20,000 needed to buy a $20,000 U.S. automobile. In 2012, however, when only 0.77 of a euro was needed to buy one U.S. dollar, a $20,000 automobile sold for 15,400 euros. Likewise, European tourists could purchase $400 to stay in a $400 hotel room in New York City for 308 euros, compared to the 500 euros the same room would have cost in 1999.
Children who track changing monetary relationships online at finance.yahoo.com/currency can become the family's financial advisers. They know when U.S. dollars will buy the most imported goods, international travel, and foreign currency. A family trip to Vancouver, for example, was a very attractive option in 2000, when the U.S. dollar was worth almost $1.50 Canadian dollars. In early October, 2012, however, one U.S. dollar was worth only 0.98 Canadian dollars. Ask youngsters to figure out how much a $100 hotel room in Canada would cost a U.S. tourist in 2012, compared to 2000.
$1 x $1 x
_____________ = ____________ ______________ = _____________
0.98 1 Canadian dollar 1.50 1 Canadian dollar
x = $1.02 x = $ 0.67
The answer: $102 compared to $67.
While worldwide economic stability makes planning for personal travel and business much easier, the art of forecasting foreign exchange fluctuations is an attractive career option for students who develop an interest in tracking foreign exchange rates. A company that expects to build a factory in Canada within the next year wants to buy the necessary Canadian dollars, when the U.S. dollar is strongest. Which way is the U.S. dollar moving in relation to the Canadian dollar, and what economic conditions, such as growth in gross domestic product, unemployment, inflation, and weather conditions, are likely to affect foreign exchange rates? It is up to would-be traders in the foreign exchange market (forex) to come up with these answers.
Finally, girls need not shy away from becoming financial whizzes. The new U.S. Chair of the Federal Reserve Board is Dr. Janet Yellen, and Christine Lagarde is Managing Director of the International Monetary Fund.
(Also, check out the later post, "Time to Revisit China's and the World's Foreign Exchange Rates.")
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