Living Abroad: Understanding Currency Exchange Rates

GraySpirit | Aug 02, 2009 | Comments 0

When living abroad, one should learn how to manage one’s budget. This involves not only managing one’s income and expenses, but also managing and planning your budget around currency exchange rates that affect your purchasing power when you retire abroad.

The US economy and the US dollar remains relatively strong, but the world is rapidly changing around us and the value of the US dollar in foreign currency exchange can fluctuate considerably over time. If you’ve made the decision to retire abroad over the long-term, it makes good sense to plan your overseas retirement budget around the changes that can occur with currency exchange rates.

Currencies are bought and sold in much the same way that any other product is bought and sold. The value of a particular currency is thus set by its supply and demand in the world marketplace. This applies to most currencies today, although there are some countries that try to fix the value of their currency to the US dollar so that the currency exchange rate does not fluctuate greatly.

In this article, we explore some of the major factors that affect the exchange rates by looking at the US currency exchange rates for three currencies from the Philippines (peso), Thailand (bhat), and Singapore (Singapore dollar) over the past 15 years. The value of these currencies have all been normalized to a value of 1 beginning in 1994 so that you can see a little more easily how the currency exchange rates have changed over time.

Currency Exchange Rates: The Effect of Local and Regional Economies

1994-1997: Currency Exchange Rates During the Southeast Asian Economic Growth Period

From 1994-1997 the Philippines, Thailand and Singapore were experiencing good economic growth. Singapore’s economy is the strongest in the Southeast Asia region and is comparable to any modern developed economy. Thailand and the Philippines are newly industrializing countries that are following the development path of Singapore, but are still significantly behind in terms of economic power and stability.

During this period, the currency exchange rates worked against the US dollar. You can notice a modest downward trend in the graph during this period. This meant that during this period, the US dollar was growing weaker against these currencies because the US dollar traded for smaller and smaller amounts of these currencies. If you were living abroad during this period, your income was “decreasing” during this period.

1997: Currency Exchange Rates During the Asian Financial Crisis

In 1997, the Asian Financial Crisis adversely affected most Asian economies. Southeast Asia was hit pretty hard. From 1997-1998, there was a huge swing in the value of these foreign currencies and they all grew weaker against the dollar. In other words, during this period the value of the US dollar rose and could be traded for a lot more of these foreign currencies.

Thailand was hit very hard during this year and within a year, the US dollar could buy almost twice as many Thai bhat as the year before. The Philippines was not as hit as hard initially but the US dollar could purchase almost 50% more pesos than the year before. The most developed of these Asian countries withstood any major fluctuations but even the Singapore dollar lost some ground against the US dollar. During this year, the currency exchange rates greatly favored Americans who were retired overseas in these countries.

1998 – 2008: Currency Exchange Rates During the Gradual Economic Recovery Period

The decade following the Asian Financial Crisis was marked by gradual recovery. The strong Singaporean economy recovered the fastest while the economies of the Philippines and Thailand recovered a little slower. From 2005 – 2007, the rate of recovery of these currencies began to speed up and Americans living or traveling abroad noticed a “weakening” of the dollar against these currencies.

Changes in the currency exchange rate between the US dollar and Philippines peso

My first visit to the Philippines was in 2005, and one US dollar could be exchanged for 56 Philippines pesos. By 2008, the peso had grown much stronger and the currency exchange rate had shifted to 42 pesos to the dollar. From that perspective, the value of the dollar had decreased by 25% during the midst of my retirement planning and was something that I had to seriously consider in my planning to retire abroad.

2008-2009: Currency Exchange Rates and the Recent Global Economic Crash

The economic crash that started in the United States in 2008-2009 affected the USA significantly, but its impact on these Asian currencies were fairly modest. The value of the Singapore dollar changed little, while both the peso and bhat lost some ground against the dollar. Still, the peso and bhat were not as adversely affected as during the 1997 Asian Financial Crisis.

Currency Exchange Rates: Summary

National Economies: The value of a foreign currency is affected by many things. In the examples provided, it is clear that the stability of foreign economies plays a big role in the stability of currency exchange rates. Singapore for example, was least affected by two major global economic crashes while both the Philippines and Thailand were more vulnerable and experienced large swings in their currency exchange rates.

Regional and Global Economies: It is also clear that currency exchange rates are affected by both regional and global economies. The regional Asian financial crisis affected many countries in Asia significantly. The recent credit crisis in America also had some impact on these Asian economies. Economic linkages between countries today are fairly strong and one cannot ignore these global influences and their ability to cause huge changes in currency exchange rates overnight.

Currency Exchange Rates: A Retirement Strategy

As part of my retirement planning, I’ve decided to manage my budget in a couple of ways.

Building and Maintaining Reserves: to offset any prolonged period of weakness in the dollar, I’ve started to rebuild some savings. I have a best case and worst case scenario for my budget. In the best case, a strong dollar buys me over 50 pesos per dollar and my budget is pretty secure. In the worst case, I anticipate a dollar only purchasing 30 pesos. Although I do not think this is likely to happen anytime in the near future, I have a budget plan in place to anticipate this worst case scenario.

Diversifying Cash Reserves: now that we’re in a period where the dollar is performing well against the peso, I’ve put a little more of my savings into peso accounts. I am not a speculator, I just keep a little more as part of my savings in pesos rather than in my US dollar accounts.

This is not a fancy get rich quick scheme. I am a conservative person and have come up with a reasonably safe way to protect my retirement income during my overseas retirement. You may want to diversify your savings further, but after the US economic crash, I have been less than enthusiastic about putting too much of my savings in stocks and bonds.

With this strategy, I am financially prepared for a strong or weak dollar. Hopefully, the value of the dollar remains strong, but should the worst happen I probably will be able to weather the storm.

Your standard of living is affected by other things besides your income and the currency exchange rate. Other important factors include the cost of living in your retirement destination and the effect of inflation over time that should also be factored into your overseas retirement plans.

(Photo by: Sanja Gjenero)

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