Last updated: 10:56 AM ET, Wed December 02 2015

Why Using US Dollars Abroad Might Not Be A Smart Move

Features & Advice | Josh Lew | December 02, 2015

Why Using US Dollars Abroad Might Not Be A Smart Move

On the surface, it sounds like a good idea: traveling to a country that uses the U.S. dollar as its main form of currency. A surprising number of countries either rely totally on greenbacks, or they are almost universally accepted alongside local bills. Both Ecuador and El Salvador have adopted the US dollar as their main form of currency. This decision was, at least in part, inspired by NAFTA and also by the successful launch of the Euro. 

Countries that use the U.S. dollar

Zimbabwe does not have its own currency. It relies on no less than eight forms of legal tender: the U.S. dollar, South African rand, Botswana pula, British pound sterling, Australian dollar, Chinese yuan, Indian rupee and Japanese yen. U.S. dollars are accepted alongside (and often preferred over) local bills in Panama, Belize, Cambodia, Laos and a host of other countries. 

The initial thought for U.S.-based travelers might be that there is an advantage to visiting a dollar-loving country. You don’t have to worry about an exchange rate or about getting ripped off when you change money. However, as Zimbabwe and its peers are finding out, using U.S. currency has at least one serious drawback

A major drawback to using the greenback

The basic issue is this: the stronger the U.S. dollar is, the more travelers from the U.S. (or other dollar-only countries) have to spend. For example, travelers would pay for their trip to Zimbabwe in U.S. dollars because that currency is widely accepted.  However, if they chose neighboring South Africa, which uses the rand (ZAR), they could get a much better deal. 

This year, the exchange rate in South Africa for $1 USD went from 11 ZAR to 14 ZAR. Tourists could take advantage of this drop in value and get 20 percent more rand. This means that their dollars would go 20 percent further in South Africa than in Zimbabwe. (Actually, since Zimbabwe uses ZAR too, the best course of action could be to use your U.S. dollars to buy rand to use in Zimbabwe). 

The same thing can occur in other countries where the dollar is accepted or used exclusively. For Americans, a strong USD will often make a trip more expensive in a dollar-using country (compared to a similar trip in a neighboring country that uses its own currency). 

Not always an issue

The idea of choosing the currency that gets you the best exchange rate is not always important. Take Ecuador, for example. Yes, it uses USD, so you can’t take advantage of the exchange rate like you can in neighboring Peru or Colombia. However, the cost of living in Ecuador is legendarily low - 41 percent lower than it is in the U.S. If you are paying $300 per month in rent and $5 maximum for meals, there is no need to worry about the fluctuations of the forex market. Cheap is still cheap no matter what your bills look like.

Currency is becoming more global. Other euro-like examples include the East Caribbean dollar and the CFA franc in West Africa. The idea of getting the most out of your currency when traveling is only going to become more important in the future. The most obvious or most convenient choice might not be the best option for getting the most value out of your money.   


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