New Zealand's weakening dollar Forward exchange contracts may benefit travellers

Press, 4 August 1981, Page 19

New Zealand's weakening dollar Forward exchange contracts may benefit travellers

By

LES BLOXHAM,

travel editor, ’ with the

assistance of Mr R. J. Gillat, manager international of the Bank of New Zealand, Christchurch.

The diminishing value of the New Zealand dollar against most foreign currencies is now a major worry for travellers planning an overseas trip. At the end of last week, for instance, it cost almost $5O more to buy $5OO worth of Australian traveller's cheques than it did three months ago. an increase of 7.7 per cent. Although fluctuating day by day, the slide appears to be continuing as shown in the following table (the example given is the cost in New Zealand currency for sAustsoo in traveller’s cheques):— April 24: $045.86 Julv 27: $692.54 July 28: $694.36 July 29: $694.25 July 30: $695.02 July 31: $694.16 August 3: $694.92 Should this trend continue it might be reasonable to predict that a New Zealander preparing to visit Australia this time next year will pay close to $9OO for sAustsoo. In other words, if he draws his maximum month’s entitlement of SNZIOOO he will then get only sAustss6 compared to about sAust7lB at present.

There is. however, an avenue open to travellers which can offer some protection against the adverse effects of the weakening value of the New Zealand dollar, particularly in terms of the

strong Australian, American and British currencies.

By entering into a Forward Exchange contract with a trading bank, the prospective traveller can fix the exchange rate at which he can purchase his foreign funds up to 12 months in advance. (This forward rate recently was loaded by a factor which made it about 5 per cent worse than the spot rate.) The contract therefore guarantees the rate at which the currency will be converted at the time of purchase. Normally banks require a deposit of up to 25 per cent when a contract is signed. It is important to stress that such an arrangement is contractually binding to both parties and that if the actual devaluation is less than 5 per cent over the year, then the traveller will be on the losing side. Nevertheless, it generally does prove a safeguard, particularly for those planning an extended holiday involving the conversion of several thousand dollars. Travellers might have to shop around to find this facility because some trading banks will not write contracts for amounts

under $5OOO. (The Bank of New Zealand is one which, at present, applies no minimum limit.)

While on the subject of travel funds it is interesting to look at the various methods, and the cost involved. of uplifting the funds. Is it cheaper, for instance, to take traveller’s cheques or cash? Several readers have also asked in recent months if there is any benefit in transferring funds direct to an overseas bank and whether the use of a credit card offers a more favourable rate than paying for goods or services with traveller’s cheques or cash. Basically, it must be remembered that the value of the New Zealand dollar fluctuates and that 'the rate of exchange is fixed each day. Variations in the costs shown below are related to charges incurred by banks in processing the options available to the traveller. The table, based on last Thursday’s exchange rates, shows the options and the cost in New Zealand dollars for the purchase of sAustsoo.— Aust banknotes: $688.14 Travel cheques: $695.02 Mail transfer: $689.64 Teleg. transfer: $694.14 Bank draft: $689.69 While traveller's cheques are the most expensive option. they offer security and convenience. Mail or telegraphic transfers and drafts are only recommended for the long.-term traveller plan-

ning to stay in an overseas city for an extended period.

Credit cards also offer security and convenience, but travellers using them overseas should bear in mind that the amount is not converted to New Zealand currency until the time of billing, often several weeks after the transaction.

As a rule of thumb, however, the conversion rate is 1 close to the banks' charge for traveller’s cheques. In fact, both American Express ' and Diners would have hilled ; their members $NZ695.02 last Thursday for an sAustsoo ; transaction. (The Visa card : rate was not available.) ; Except for uncertainty 1 over their ultimate rate of ' conversion, credit cards in my opinion offer the traveller more advantages than any other means of foreign-1 exchange payment. These j plastic cards can settle a ■ large bill quickly without the j need to countersign often a I multiplicity of traveller’s I cheques: they do not yet j incur as. far as the New I Zealand user is concerned, a charge for stamp-duty, (cheques do in some coun-| tries): they can be used to ’ guarantee deposits and re-1 servations, and most import-1 antly, they offer all the security of cheques if lost or ' stolen. Some notes, or; cheques, should of course be carried for small purchases. : It is interesting to note that most travellers still prefer cheques. A survey just ; released in the United States revealed that 64 per cent of • American travellers used I cheques, 19 per cent cash. 17 per cent credit cards, and 4 per cent other means such as < bank drafts and transfers. (