Why You Don’t Use Your Bank for Foreign Exchange

To prepare for my trip, I just exchanged some dollars for euros at my local bank. While we own euros in one of our investment accounts, I needed cash and there was no easy way to actually get cash out of that account.

symbol showing bank with a prohibited crossI figured I’d get a bad deal, but it was worse than I expected. On a day where the mid-market rate for euros was in the 1.105 range, I had to pay 1.145 at the bank. That’s a fee of about 4%.

I’m glad I have a better way to do it for large amounts. Working through my investment advisor and Fidelty, we pay only 0.3%. I think we’d only pay 1.0% on a smaller amount.

Next time, I’ll see if I can do an exchange and get euros in cash through Fidelity.

Image source
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Put Your Money Where Your Mouth Is

OK, we chose a property and have a preliminary deal. Now, soon, we need to have enough euros to pay for it. That’s making all of this more real. And a bit scary. We need to liquidate some assets and convert the dollars to euros.

The Good News

As Anne has mentioned, one of the major factors driving us to act now on the Italy adventure now was the USD/EUR exchange rate. From the high level of $1.60 per €1.00 in 2008, it bounced around in the $1.30 to $1.50 range through mid-2014.

Euro vs US dollar graph
USD per EUR history
Click image to enlarge

Then it started to fall. Dramatically. By the spring of 2015 it was at just over $1.05 per €1.00. (That was a 30% increase in our buying power in about 9 months.) It’s traded in the $1.05 to $1.15 range over the last year.

That’s fairly narrow range, but still enough to push the dollar price of a property up or down 10%. So, when to act and make the conversion? Some “experts” were predicting parity, $1.00 for €1.00.

The Bad News

After my exploratory trip last year, I started trying to figure out how to turn our valuable dollars into cheap euros. And what to do with them after I converted them. (My mattress was already in use.)

It turns out that holding them isn’t a problem. I talked through the problem with our financial guy, and he told me we could just hold them in a US-based investment account. No need to go to the Cayman Islands — though that would give the whole adventure an air of high finance and intrigue.

So let’s figure out how to actually convert our dollars.

dollars and euro exchangeNot a problem, right? In the Internet world, you’d think that currency conversion would be fast and cheap. Just send a few bytes down the wire, get a few back, and I’ve got euros in the bank.

Not if you believe what you find when you start researching the methods and costs of conversion. The water is murky

Let’s go to the bank. No. All the sites, books, and articles tell you to avoid your bank. They’ll charge a 2-3% fee, which adds up on a few hundred thousand dollars. A lot of money per byte. Sorry, BMO Harris.

From these same sites, I discover these specialty foreign currency exchange firms. The best ones seem to be in the UK and they tout that they are regulated, so the transaction is safe. They charge 1%. Better, but still a lot for just pushing a button.

Recently, another option, the Uber of foreign currency, has appeared. It’s called Transferwise and they facilitate peer-to-peer exchanges: someone in Europe has euros and they want dollars. I want euros. So we swap. Transferwise takes 0.5%.

So I’ve gotten the cost down, but I’ve introduced more risk. Is this for real? I might try it with $1,000, but it seems too speculative to use for a house purchase.

The Good News

Now, with only a week or two to act and make the conversion, I ask my financial guy to look again at this whole process. Bingo! After a few calls, he discovers the answer, one I didn’t find online, but one that seems obvious in retrospect.

Fidelity. This large investment firm would make the trade for 0.3%, at the same mid-market rate a large business would get — $1.105, in our case. (The “mid-market rate” is the mean of the current bid/ask spread.)

The final piece was pulling out the dollars to convert. Like some sign from above, the US stock market jumps 1.5% in one day, to a fraction of a percent below the all-time high. The euro is at $1.10, not the low but close enough. So we did it.

Now we’re the proud owners of a few hundred thousand euros. I feel more Italian already.

Chart source: https://www.ecb.europa.eu/stats/policy_and_exchange_rates/euro_reference_exchange_rates/html/eurofxref-graph-usd.en.html
Image source: www.pixabay.com License: CC0 Public domain. Free for commercial use. No attribution required.