gE Blog Series: Impacts of International Tourism Part 2 - Currency Exchange Rates and the Purchasing Power of Money

Exchange rates for currencies across the world are akin to a seesaw - they need a balance. As a result, the simplest differences in the exchange rates can have drastic ripple effects on economies due to the economic purchasing power principle. If your domestic currency is trading strongly (weakly) against a foreign currency, you have increased (decreased) your purchasing power and can purchase more (less) just from currency swapping. The effects of currency exchange on purchasing power can be in the form of government policy, such as Japan, or based on the nature of current positive market conditions within the economy like the United States. As you will see, exchange rates can have a drastic impact on tourism globally.

With the U.S. dollar increasing 15% against the yen and the euro the last 6 months, and 18% against the Australian dollar, this is the best time for Americans to travel to places such as Europe, Japan, and Australia, among other tourist destinations. The increased purchasing power of the dollar will encourage Americans to travel and spend money abroad, providing a boost to recovering economies in Europe. However, this is also a double-edged sword for the U.S., as the decreased purchasing power for foreign visitors to the U.S. scares away would-be travelers. With a 10% dollar appreciation, there is a correlation with international visitors dropping by 2% annually. As a result, its tourism industry could face losses of up to $200 billion.

Nonetheless, popular tourist destinations and struggling countries will increasingly benefit from a weaker currency at the expense of another currency. In Japan, the intentional economic policy to keep the yen low is a win-win for the country, as the economy relies heavily on exports and international tourism. The weakness of the yen is attractive to tourists with stronger domestic currencies who will end up benefiting from currency exchange. They will then be able to use this extra money to spend even more on consumer goods and services, effectively boosting Japan’s tourist economy. In 2014, foreign visitors spent a record ¥2.03 trillion, an increase of 43.3% from last year.

To summarize, as long as one currency is strong and gaining, another has to be weak and declining – a balance. With this important realization comes the close relationship of international tourism with exchange rates. If a popular tourist country is experiencing a decline in their currency, they can expect a greater attraction from a country whose currency is experiencing an incline, and vice versa.