Martin Lewis: Should you buy your holiday euros/dollars now or wait?

The pound is still in the doldrums. A few years ago, before the EU referendum vote, a pound bought €1.43 – since it's dropped significantly and hasn’t recovered much. Last summer it bought €1.14, and today it’s hovering around the €1.12 mark. Against the dollar, the rate is just $1.32 – about a decade ago it bought roughly $2. It’s similar with most other currencies.

This has hit imports and the cost of living. Yet that’s an indirect cost to most. The most obvious effect is more expensive holidays. No surprise, then, that my social media feeds are swamped with people asking me, "I’m going away in about six weeks - should I buy my euros now or wait?" And certainly as we live in times of such constant political uncertainty, it’s an important question.

The problem is there is no law of exchange-rate gravity: just because a currency has dropped, it does not have to bounce back. So I wanted to bash out a blog to explain your options…

Currency moves are complex

When I took economics A-level I remember answering a question on how increasing UK interest rates impacts exchange rates. In a nice logical sense, I answered that it makes the pound stronger, as people from abroad can get a better return than before saving in pounds, so they’ll move money into pounds to save. I think I got good marks.

If only real life was that simple. Markets move based on expectations, so if interest rates go up, but not as much as was thought, that could make the exchange rate drop. Yet many other factors affect the pound’s strength – general economics, speculation, political stability and more.

And one hand can’t clap. Exchange-rate moves are about the relative strength of the currency you’re buying, too. So all the same factors impact that currency’s strength, and it’s the resultant interaction that dictates the price.

For example, after the Brexit result, which the markets (rightly or wrongly) didn’t like, the pound dropped against the euro, but dropped more against the dollar – because the euro itself was weakened by the result.

How is the pound going to move in the next few months?

Put simply… I don’t know. And anyone who tells you they do is a liar. Currency rates fluctuate each minute, both on the economics and the whims of City traders trying to second-guess those movements.

Of course someone will say, “Buy now”, someone else will say, “Wait”, a third that rates will stay the same. One will be right, and may say, “I told you so”, but that doesn’t mean they knew. 

So I don’t bother to guess. I just spend on my plastic abroad and it converts the amount I spend at the best rate as I spend (see how to get the best rates on the day you spend below), however…

‘If you’re nervous, hedge your bets’

To do this, buy roughly half what you need at today’s best rate – whether in cash or on a prepaid card (see how to get today’s best rate), and then for the rest just rely on the best rate on the day you spend.

If you’re really nervous, ask yourself, “Would I be content with today’s euro rate for my holiday money…?” If so, and your real fear is that the rate worsens so your holiday would be unaffordable, play safe and buy more than half now.

But if you do that for safety’s sake, it’s best to close your eyes afterwards. If the pound does strengthen, so you’d have been better off waiting, you don’t want bitterness from hindsight to ruin your holiday.

A short-term way to protect against currency swings

A few bureaux de change’s terms can be manipulated to give you short-term protection against currency swings. These allow you to order for collection at today’s rate, and cancel in up to 14 days’ time. That way if the rate weakens you’ve locked in; if it improves you just cancel and buy at the new, better rate – it’s a bit like an insurance policy.

Yet these bureaux tend not to have great rates, and we’re only talking 14 days. So I would only do this if you are buying before a period of severe political uncertainty (eg, if a government were collapsing or a general election were called – I’ll leave it for you to judge for yourself if that’s happening).

At the time of writing Travelex and Moneycorp let you book rates for collection now, up to 14 days ahead, and cancel for free. Sainsbury's lets you book up to eight days ahead but there's a £10 fee to cancel. Do compare their rates with the best from our TravelMoneyMax tool to see the effective extra cost of this ‘insurance’.

How to get the best rates on the day you spend 

The easy option is to get and spend on a specialist overseas card, where the currency conversion is done at the time you spend.

These give you the same near-perfect exchange rates the banks get, in almost every country, time and time again, and unlike most debit and credit cards which add a 3% ‘non-sterling exchange fee’, these don’t charge. There are two standout picks right now (the links take you to full info).

  • The Halifax Clarity credit card has perfect rates worldwide on spending, you get £20 cashback if you spend in a foreign currency before the end of September, and it has been around with good feedback for a long time. Though as it’s a credit card, ensure you religiously pay off IN FULL every month (or you pay interest – in which case don’t do it).
  • The Starling Bank debit card has no credit check (unless you want an overdraft) and has perfect rates on cash withdrawals as well as spending. Yet it’s new and I don’t know how long it’ll stay at this uber-cheap rate. 

There are other cards in the running - for full updated options, pros and cons, see Top Travel Cards.

Just ensure, when using these, that if you’re given the option abroad between paying in local currency (eg, euros) or pounds, you select the local currency, or you’ll not get the benefit (see my Pay in euros? blog).

How to lock in today’s best rate 

This just means converting your money today even if you’re not going to spend it. There are three ways to do this.  

  • Want today’s best cash rate? Compare rates from 30+ bureaux. If you want cash, of course you get the rate on the day you pay. Ignore any flannel like ‘commission-free’. What you want to know is, “If I give you £500, how many euros will you give me after all charges?” And that’s the way to compare.

    You can do this via TravelMoneyMax, which compares about 30 online bureaux. It also shows you how extortionate it is to change at airports. If you must do that, at least pre-order for pick-up, as you get a better deal.

    And beware paying for currency at UK bureaux by credit card, as this usually counts as a cash withdrawal, so there’s a fee and interest even if you fully repay – so it’s best to pay with a debit card, or cash.

    Do also think how you’re going to store the cash safely. Beware paying a bureau de change now, and letting it hold onto substantial cash for you for a time, as there’s little protection if it went bust.
  • Prepaid cards give you today’s top rate, and are easy to get. Prepaid cards have no credit check so anyone can get them. Plus unlike credit cards where you get the rate on the day you spend, with these cards you usually load them with cash before you travel, at that day’s rate. So it’s a good way to bag a rate now for spending later.

    Of course, if the pound strengthens by the time you holiday, you lose; if it weakens, you gain. The current top picks are Revolut and WeSwap, on rate and the lowest charges. For full options, details and analysis, see Top Prepaid Cards.
  • Get a UK euro bank account. This is only worth doing if you travel to Europe a lot (perhaps you own a holiday home) – or spend substantial amounts. A few UK banks offer these, including CitibankBarclays and Lloyds Bank (monthly fees may apply, so check).

    They operate as a normal bank account, but in euros. If you’re depositing cash, the bank will usually do the conversion for you on that day, but be careful as the rates are usually awful – so don’t do it automatically, check in advance.

    You can often call the bank to try to negotiate a better conversion rate (especially for larger amounts). Alternatively, use one of the international money transfer firms to deposit the cash there for you.

What will you do?

So where do you sit on this? Will you hedge, get a specialist rate? Do let me know...