September 18th, 2006

Blurb: Changing Canadian dollars into foreign funds comes at a cost. If you don’t watch out, you could get burned. 

Navigating the foreign exchange jungle

By Peter Diekmeyer •

One of the biggest impacts of the Canadian dollar’s strength during the past few years has been that it is now much cheaper to make foreign purchases. Not only are import prices falling across the board on U.S. made products, but it is also now cheaper for Canadians to travel in the U.S. and in a slew of countries, such as China and Hong Kong, whose currencies track the U.S. dollar.

The strong Canadian dollar has also led to a huge spike in the attractiveness of cross-border shopping. Despite having to face the post-911 era’s long border lineups and increasingly surly customs officers, the potential of attractive savings from a quick trip across the border will no doubt become increasingly attractive budget hungry Canadians.  Yet according to one expert, if Canadians are going to travel more, import more and do more cross border shopping, they are also going to have to pay more attention to their foreign currency transactions.

“There are more options out there than ever before,” says Cleo Brown, a vice-president of Canadian-owned Custom House, the largest independent foreign exchange company in North America. “But not all of them offer comparable value for your money.”

While Canadians can now buy cash at banks, foreign exchange offices, through travelers’ checks and even on-site, the costs and benefits of doing so vary with each institution. “To get the best deal, you need to balance the convenience aspect of making foreign exchange transactions when it is most practical to do so, with the amount of money you are willing to pay for that service,” says Brown.

The costs and benefits of foreign exchange

For example one of the easiest ways of exchanging currency is to do so at the retail level. Stores and restaurants in U.S. border towns as well as those in major cities that deal with a large amount of tourists, will often gladly accept Canadian dollars. But they will often do so at exorbitantly high rates of exchange, sometimes as much as 10 per cent above market rates.

The key is to be informed. Travelers need to check the exchange rate charged by their banks back home, before leaving on a trip. A retailer will typically charge a premium of the rate offered by banks, but if he gets too greedy, take your business somewhere else.

That said, loading up on large amounts of foreign cash before embarking on a voyage also has its downsides, says Brown. “If you think about how much money a typical family of four spends on a week long vacation, it could run into the thousands of dollars. Most people would not feel comfortable carrying around that kind of cash.”

André Belair, a foreign exchange expert with the Movement Desjardins agreed that the proper exchange rate tool to use depends on the value of the currency involved and the purpose for which it is used. For example Belair advises travelers to remain flexible, by carrying the widest variety of foreign exchange tools possible, in case one of them proves impractical to use. Common tools include travelers’ checks, hard currency, two debit cards (in case the magnetization wears out on one) and at least one credit card. 

Most banks post the foreign exchange rates that they offer for a wide basket of currencies on their Web-sites. They also tend to give small discounts for wire transactions or exchanges that do not involve the actual manipulation of cash bills.

Getting the best rate

That said, figuring out how which of these options will get you the best value is not easy. Most banks post the rates at which they will buy or sell a particular currency, with the difference between the rates known as the “spread.”

For example in the middle of September, one of the largest Canadian financial institutions was offering to buy U.S. dollars for $1.0998 CDN and to sell them for $1.1398 CDN. The difference between those two rates (which works out to about 3.5 percent) is what it would cost you to buy U.S. dollars and then to convert them back into Canadian currency. Your actual foregn exchange transaction cost, if you are planning to spend the U.S. dollars you buy (and to not convert them back into Canadian dollars) is half the spread, or about 1.75 percent.

According to Visa Canada spokesperson Tanya Freedman, Visa offers participating banks a rock bottom wholesale exchange rate on most foreign currency transactions. The individual banks are then free to choose what fees they want to add on. “These fees generally vary between 1.8 percent and 2.5 percent of the amount exchanged and are spelled out on your cardholder agreement,” said Freedman.

That said, customers should be careful of a service called Dynamic Currency Conversion, which is offered by many European retailers says Freeman. At the point of purchase, the retailer’s cash register will show the sales price in both the local and Canadian currency, leaving the customer the choice as to which one they want to pay in. “The rate offered in those types of services is not a Visa rate, it is that of the retailer involved, so you should check it carefully.”

Less widely traded currencies

However according to Custom House’s Cleo Brown, the spreads on less widely traded currencies can be significantly higher than those charged when exchanging those from countries with “Western”-style economies such as Europe, the U.K. the United States, Japan and Australia.

“Currencies depend on supply and demand,” says Brown. “Most financial institutions simply don’t get as many requests for exotic currencies such as the Thai Baht and the Indian Rupee.  That means they will often have to inventory the money for quite some time before exchanging it, which means carrying costs are naturally higher.”

Peter Diekmeyer ( is a freelance business and economics writer.





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