Nice currency windfalls when traveling far. How did that happen?

The news that the border will reopen to holidaymakers has sparked a stampede on bookings for southern European campsites and bungalows. For those who prefer to travel a little further for a tropical getaway in the fall, there is a nice (currency) windfall ahead.

Taking a few weeks of vacation is a good way to wash away the bad feeling of curfews and lockdown measures. For many Dutch people, money is not the stumbling block to get away from it all. We could hardly leave the house for months and therefore hardly had the opportunity to spend money. This is also clearly visible in the savings mountain of Dutch households.

Since the beginning of 2020, this has grown by more than €30 billion to no less than €400 billion. And thanks to the relaxation that is coming, corona will no longer be a reason to stay at home. Millions of Dutch people are expected to celebrate the summer holidays in Germany, France, Italy, Spain or Portugal. But it also doesn't hurt to see if it is an option to seek out the tropical sun in winter.

Euro worth a lot more
The saved euros are worth a lot more in distant countries than before the pandemic. For example, the Turkish lira has fallen by 15% in the past 35 months and the Egyptian pound has fallen by almost 10%. Currencies of popular destinations in Asia and Latin America also lost ground: -10% for the Thai baht and -16% for the Mexican peso.

The investment world looks at the price movements of these currencies through a completely different lens than holidaymakers. Behind the price declines lies much more than the stagnation of the tourism sector – which is an important economic engine in many countries. The rising inflation in the United States in particular is one reason why the currencies of emerging countries are coming under pressure again, according to many specialists.

Bad for emerging markets
If the Federal Reserve raises interest rates to contain that inflation, it could give the dollar a boost. A higher interest rate makes it more attractive for investors to hold their assets in a particular currency. And a higher dollar is bad news for emerging market companies and governments, which have issued loans in US currencies. The economic policy of emerging countries also plays a role in the falling exchange rates.

In March, for example, the Turkish lira plunged by 15% after Prime Minister Tayip Recep Erdoğan fired the director of the central bank. The only reason was that the man wanted to do his job: raise interest rates to stem inflation. Sunbathers and other travelers are not interested in these kinds of decisions. For this group, it's especially good news that the value of their euros may rise further against distant holiday currencies in the near future.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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