Evan Soltas
Mar 19, 2015

Traveling on a Strong Dollar

"Vacation is all I ever wanted," goes the early-80s song, which I admit I know from watching Rugrats as a kid. And, as the dollar gets stronger and stronger, the newspapers are singing the tune.

The Washington Post has a list of "the best places in the world to visit while the dollar is this strong." And Matt O'Brien writes:

The good news, if you're planning on taking a trip abroad, is that the dollar is on a tear...That's made it an opportune time to take, say, that European vacation you've been thinking about, but maybe couldn't afford when the euro was worth $1.45 instead of the $1.13 it is now.
The whole world is on sale, so travel now, now, now. Or that seems to be the suggestion. Yet I was curious if Americans actually game the exchange rate in traveling abroad. In other words, does foreign travel respond to the exchange rate? Or are people going to use up their vacation days, no matter how unfavorable the currency situation is?

The U.S. government keeps surprisingly good data on travel. That's because, when foreigners come to the U.S. and clog Times Square, for example, the money they spend on plane tickets and tacky "I ❤ NY" t-shirts actually count as exports. And when you go abroad, the dollars you spend overseas count as imports.

Also, the relevant measure that determines the attractiveness of a country, at least as far as currency is concerned, is the real exchange rate. It doesn't help you if the currency is cheap but all the goods are overpriced, so real exchange rates take into account both the exchange rate and relative price levels. I've simply taken the trade-weighted version of the real exchange rate so that we can look at all travel at once.

You can try to discern patterns between inbound and outbound travel and the exchange rate in the graph below. Recall that, when the exchange rate goes up, it makes outbound travel cheaper and inbound travel more expensive. So we might expect outbound travel to rise, and inbound travel to fall, when the exchange rate rises.

It's actually not that clear to me there is a relationship. But we can look at this more systematically. The math gets a little bit involved -- if you want to know more, see here -- but, in short, what we want to know is if the exchange rate rises one percentage point, how much more will Americans travel abroad and how much less will foreigners visit the U.S.?

Using the data we discussed earlier, here's what I found.

Americans don't travel more when the dollar strengthens. But foreigners do cut back on their trips to America. In fact, for every one-percentage-point increase in the dollar's value (as measured by the real trade-weighted exchange rate), foreigners' travel spending drops by half a percentage point. And those cutbacks happen immediately after the shock to the exchange rate.

So, to disagree with Matt Klein here, the data don't support "hordes of American tourists" going to Europe. Now, the work I did here was quick-and-dirty, so a finer look at the data might find something different. I have concerns about 9/11 and the financial crisis -- which affected travel and were not directly related to the exchange rate, but happened to coincide with big moves in the dollar, being an issue here.

Nevertheless, it doesn't look like Americans spring for foreign vacations when the dollar is strong. Yet foreigners do notice a strong dollar, and they respond by traveling less or spending less when they do come. One wonders, though, why Americans don't get their acts together and game the exchange rate like the rest of the world.

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Via Twitter, Université Laval professor Stephen Gordon notes that Americans do seem to travel to Canada when the dollar is strong.