Time to stash some foreign currency

Bina Brown

ForexCT’s Steven Dooley says you could pay 3 to 8 per cent on transactions so it pays to shop around. Photo: Luis Ascui

Fasten your seatbelts. The Australian dollar could be about to run into turbulence.

Currency predictions are often wrong but some pundits predict the Australian dollar will slide to US80¢ and €0.75 by mid-year so it could be wise to stockpile currency if you have an overseas trip planned.

An obvious way to lock in current exchange rates is to buy either cash or travellers cheques now, although you’d want to check they are covered by home contents insurance.

Another option is to use prepaid currency cards sold by banks and currency outlets such as American Express. The exchange rate is set at the time you load the card – but check the card doesn’t expire before you take the trip.

Depending on the issuer, the upfront fee is about $15 (it can be free for some customers). Nothing is charged to initially load the card but every time cash is added a fee of about 1 per cent may apply. Several currencies can sometimes be loaded onto one card at once.

The card is used like a debit card, but without the foreign transaction fee charged by merchants when you make a purchase or booking.

Using it to get cash out of an overseas automatic teller machine will cost a few dollars.

Some overseas merchants may offer card users the choice of paying in Australian dollars. But the exchange rate charged will almost certainly include an extra profit margin for the shop, according to CreditCardFinder.com.au editor Jeremy Cabral. And the rate they charge may not be as competitive as that offered by your bank.

A downside of buying currency ahead of any intended travel is the interest forgone on savings. Regular travellers might consider a foreign currency account to be like depositing funds at today’s rate; just don’t expect to earn any interest.

There are generally two fees when buying foreign currency: a currency conversion fee and a foreign transaction fee. Cash or travellers cheques will incur a currency conversion fee based on the exchange rate of the day.

ForexCT head of research Steven Dooley says you can be charged between 3 to 8 per cent on transactions so it pays to shop around. Cashing in travellers cheques may attract an additional fee, depending on the issuer and where you cash them.

Using an everyday transaction card or a credit card while overseas will generally attract both a currency conversion and a foreign transaction fee, which vary depending on the exchange rate of the day and the merchant.

The first decline in the dollar could follow the Reserve Bank of Australia’s meeting on February 7.

It is not the expected lowering of interest rates that will move the currency but the comments that go with it, says Commonwealth Bank currency strategist Joseph Capurso.

Concerns about the growth rate in China or Europe could mean further rate cuts in March, Capurso says, which could push the dollar down. He expects it to be below parity with the US dollar in the next six months and to hit €0.75.

The Australian Financial Review