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Five ways to beat the weak pound
By Tanya Powley
Holidaymakers planning a trip to the eurozone and the US are set to suffer after the value of the pound hit a new five-month low against the euro.
The pound dropped to as low as 90.45p per euro last Tuesday (22 September) after the Bank of England warned sterling could fall further as a result of the credit crisis. It also reached a three-week low against the US dollar, down to $1.6169.
The fall in the pound against the euro and the dollar will put added pressure on UK holidaymakers heading to Europe and the US as their holiday money becomes even more stretched.
Low exchange rates may also impact the consumer indirectly, as higher import prices for producers are passed onto the customer in high street stores.
Why has the pound fallen in value?
Foreign investors have helped offset the UK's current account deficits for more than a decade. The central bank warned the financial crisis may have deterred overseas investors from purchasing sterling assets.
"As a result, the long-run sustainable real sterling exchange rate...may have fallen," it added.
The Bank of England believes the days of the UK enjoying a strong pound could be behind us.
In December last year, the pound fell below parity with the euro for the first time since the European currency was launched in 1999.
Currencies Direct says that although the pound is holding around the €1.10 mark on Tuesday, there is a risk it could fall lower on Wednesday when the latest Bank of England minutes are due.
The minutes are expected to reiterate "the negativity and dovish tone of the Bank of England", Currencies Direct adds.
Duncan Higgins, senior analyst at currency broker Caxton FX, says the past couple of weeks have seen the pound come under severe pressure as investor confidence ebbs away from the British economy.
"A combination of concerns about quantitative easing, the health of the UK banking system, and the latest Bank of England news stating sterling's long-run sustainable exchange rate may have fallen due to the financial crisis, have made sterling vulnerable," he explains.
Higgins said the pound could reach parity with the euro by the end of October.
Five ways holidaymakers can beat the weak pound:
One of the biggest mistakes many of us make each year is to wait until we get to the airport to change our currency. But bureaux de change at airports and hotels benefit from a lack of competition, and in most cases offer poor exchange rates.
That doesn't mean you should be content to buy your currency from your local high street bank.
Again, the exchange rate might not be very competitive, and when the pound is so weak it's vital you get as much for your money as possible.
Use the internet to compare deals - the Post Office and Marks & Spencer (MKS) tend to offer fairly competitive exchange rates, but don't rule out buying from an online currency provider. While this latter option will require you to plan ahead, it might be the best way to get more for your pennies.
The best way to find the best deal is to compare the total cost in sterling of any foreign currency purchase - if in doubt, ask how many units of currency you'll receive for your bulk sterling payment. Don't be swayed by promises of commission-free exchange, as the exchange rate might offset this saving.
James Hickman, managing director at Caxton FX, says holidaymakers should plan ahead and seek out the best currency deals before going away.
"Even if the euro advances only a little further, tourists should expect parity at an airport bureau de change or high street currency provider," he adds.
2. Consider avoiding the ATM
If you intend to withdraw money from your current account while abroad then make sure you find out what charges this will incur ahead of your trip - it might make you think twice about relying on your debit card.
Most providers charge their customers with loading fees and cash withdrawal charges when they use debit cards abroad - these can make purchases and cash withdrawals all the more expensive.
Generally speaking, it is best to avoid making small purchases with a debit card because, alongside loading fees, you may also be charged a one-off transaction fee by your provider.
3. Use the right credit card
Using a credit card on holiday can actually be a good idea as all purchases between £100 and £3,000 are covered by the Consumer Credit Act - this means your provider is jointly liable to refund you should something go wrong.
However, before you stick purchases on plastic, you should think about how much it will cost you. The vast majority of credit card providers charge for overseas transactions - these normally range between 2.75% and 3% and can add significantly to the cost of your overseas break.
It is possible to avoid these fees altogether by opting for a fee-free credit card - sadly, only the Santander Zero credit card and the Post Office waive these fees at the moment.
4. Dynamic currency conversion
When paying for goods abroad on card you may be offered the option to make the payment in sterling as opposed to the local currency - this is known as dynamic currency conversion.
However, it is hard to know whether you are getting a good deal because the retailer or bank will apply its own exchange fee.
Generally speaking your own bank or provider is likely to offer a more competitive exchange rate, so paying in the local currency is normally the cheaper option.
5. Alternative ways of paying
Taking out a pre-paid currency card is a good way to use plastic abroad without being hit with the associated fees. You can't go overdrawn on a pre-paid currency card - instead, you load up the card with money that can then be spent in shops or used to withdraw cash.
While it's fairly easy to get a pre-paid card, it's well worth doing your research and shopping around. The first thing to watch out for is the cost as many pre-paid card providers charge fees.
Sadly, these are not always easy to compare. Some providers may levy a general usage charge, while others will hit you with fees when you withdraw money. Some even charge if you fail to use your card for a certain period of time.
In addition, it's important to find a card that offers a decent exchange rate.
Travellers cheques, while often dismissed as old fashioned, are also worth considering as an alternative way of paying. These are an ideal way to avoid credit and debit card fees, and to protect your money should you lose your bag or fall victim to theft.
However, bear in mind that exchange rates on these cheques aren't always as competitive as changing currency, plus you'll need to show ID in order to cash them.
Also, remember to make a note of the serial numbers so you can replace these should you need to.
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