Traveling on a Stronger US Dollar

Planning for a trip abroad? The higher for longer interest rates may also keep the US dollar stronger for longer this year. Here are some insights from Goldman Sachs Research.

Airlines are gearing up for a demanding summer when more than half of Americans are planning to fly, according to the latest Summer Travel 2024 survey from The Vacationer, a travel website. About 18% of those flyers, led by the younger demographic (30% are within the 18 and 29 demographics compared to 10% who are 60 and over), plan to go abroad.

As inflation is top of mind for many consumers with expenses going up, there is a silver lining in the Federal Reserve’s decision to keep interest rates higher for longer while waiting for improved economic data: a strong US dollar, which could be great for those traveling abroad.

US dollar may stay stronger for longer

The dollar has been highly sensitive to the Fed policy in the early part of this year, but Goldman Sachs Research analysts note that the foreign exchange market has lately been focusing on the modest misses in US data and solid growth in the rest of the world, particularly in the eurozone.

Following the approaching US election, protectionist or inflationary policies may support the dollar. Given this uncertainty about future trade policy and fiscal support, our analysts think investors will be reluctant to buy overseas currency assets ahead of the event, which should keep the US dollar strong. In fact, this scenario has happened before.

In the months leading up to the 2016 election, global growth sentiment improved but outflows from the US to other jurisdictions remained constrained, and currency-specific tariff risks helped support the dollar.

This comes on top of two longstanding pillars of support for the dollar: 1) strong total returns on US assets continue to make the market attractive as a safe-haven, and 2) there is yet to be a challenger to the dollar.

Strong US asset performances have set a high bar to beat, and structural issues in the key challengers – namely, the euro, yen, and renminbi – make it hard to move the US dollar down. FX (foreign exchange) is a relative game, so it is likely the dollar will stay stronger for longer.

Tips to save on flights

If you cannot avoid flying this summer during the peak season, there are a few ways you could save on your ticket.

1. Book directly with the airlines: Even though flights through popular online travel agents (OTAs) websites might give you cheaper prices, if you need to change your ticket, they may charge you additional fees on top of any airline fees for the change. Most airlines can be booked directly through their website or customer service.
2. Be flexible with your arrival and departure airports: If you are landing in a major city with multiple airports, choosing a smaller airport may be cheaper than passing through the big hubs, as long as your last-mile destination isn’t too far from that airport. Also consider cheaper, less touristy destinations if it’s a beach vacation you’re after. Besides, who can really relax on an overcrowded beach?
3. Minimize flight disruptions: Consider booking direct flights so you’re less likely to be left at the mercy of flight availability if one or more legs of your journey gets canceled. According to travel data firm, Airline Reporting Corporation (ARC), early morning flights or flights departing before 3 p.m. on average, are less likely to be canceled than those departing later in the day. If you must rebook a canceled flight but the airline counter queue is long, try calling the airline’s international customer service line where the agent on the phone can also help you rebook as well.
4. Time your booking: If you see a good price, it’s best not to wait because it can go up fast. Try booking on Sundays as airfares tend to be cheaper than booking on Fridays, according to ARC. They also noted the best deals could be found booking 28 days out for domestic flights and 60 days but not more than 4 months out for international flights. Take advantage of online search tools that allow you to set price alerts, so you won’t miss a deal.
5. Watch out for added travel fees: At each point-of-sale abroad, you may be offered to pay with your home currency if you pay with a credit card, but this may come with added fees such as the dynamic currency conversion fee, which is charged by the merchant’s bank. It’s typically better to pay in the local currency to avoid this unnecessary charge.