Foreign exchange
By Peter Diekmeyer • Bankrate.com

One of the biggest impacts of the Canadian dollar's strength during the past few years has been how cheap it is to make foreign purchases. Not only are import prices falling across the board on U.S. products, but it is also cheaper for Canadians to travel in the U.S. and in a slew of other places, 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 appeal of cross-border shopping. Despite having to face long border lineups and increasingly surly customs officers, the potential savings from a quick trip across the border will no doubt become increasingly attractive to budget-conscious Canadians. Yet according to one expert, if Canadians are going to travel more, import more and do more cross-border shopping, they will also 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 the 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, airports and even on-site at many retailers, 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
One of the easiest ways to exchange 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. Travellers need to check the exchange rate charged by their banks before leaving on a trip. A retailer will typically charge a premium over the rate offered by banks, but if they get 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, agrees the proper exchange-rate tool to use depends on the value of the currency involved and the purpose for which it's being used. For example, Belair advises travellers to remain flexible by carrying the widest variety of foreign exchange tools possible in case one of them proves impractical. He suggests carrying some travellers' cheques, hard currency, two debit cards (in case the magnetization wears out on one) and at least one credit card. 

Most banks post their foreign exchange rates on their websites. 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 which of these options will get you the best value, and how, 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, which basically amounts to the trader's gross margin. The larger the spread, the higher the transaction costs.

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

According to Visa Canada representative Tanya Freedman, Visa offers participating banks a rock-bottom, wholesale exchange rate on most foreign currency transactions. The banks that issue the cards are then free to choose what fees they want to add on. "These fees generally vary between 1.8 per cent and 2.5 per cent of the amount exchanged and are spelled out on your cardholder agreement," says Freedman.

That said, customers should be careful of a service called dynamic currency conversion, which is offered by many European retailers says Freedman. 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. "Even though you may use your credit card when making the purchase, the rate offered in those types of services is not a Visa rate," says Freedman. "The rate offered is that of the retailer involved, so you should check it carefully."

Less common currency more expensive
According to Custom House's 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 United Kingdom, 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.