The mystery of exchange rates: why your holiday feels more expensive
Eva Brakonier, Jack Liu, Timon Tsapanos, Theo Delvaux and Marie-Catherine Motingea (Left to right) Montage: Paperjam
Why does your holiday suddenly feel more expensive than it should? Behind every card payment are exchange rates, hidden spreads and shifts in purchasing power. From the Big Mac Index to strong currencies, here’s what really determines how far your money goes abroad.
Picture this: you arrive in a foreign country, and you are filled with excitement. At first glance everything seems affordable. Coffees, taxi rides, meals, it all feels underpriced, until you check your banking app and your whole perception turns upside down. Suddenly your planned budget becomes very tight. But why? The answer lies in a mix of mechanisms we rarely notice but constantly interact with currency fluctuations, exchange rates and hidden bank margins.
Before going any further, let’s tackle a seemingly simple question: what exactly are exchange rates? Exchange rates represent the value of one currency relative to another. In other words, they tell us how many euros you need for a dollar. Their fluctuations influence the decisions of individuals planning a vacation, businesses managing imports and exports, and governments shaping economic policy.
Ask & Bid eats your budget
A common misconception is that there is one fixed global exchange rate that every bank applies. Many travellers check the exchange rates online and assume that their bank will use that exact rate to convert their money. In reality, banks operate with two different rates, the ask and the bid price.
The bid price is the rate at which a bank is willing to buy a foreign currency from you and the ask price is the rate at which the bank sells that currency to you when you convert your money. The difference between those prices is called the spread. For example, if the market exchange rate is €1 = USD1.2, a bank might sell dollars to you at 1.15 and buy them back for 1.25. This small gap between the two rates is the spread. On a single purchase, the impact seems irrelevant but over the course of an entire holiday, it adds up.
The Big Mac Index
Purchasing power simply means how much your money can buy in a certain country. Even though the burger is much cheaper in Taiwan, salaries there are also generally lower than in Switzerland. So you can’t just look at prices alone, you also must consider income levels.
One important thing becomes clear: one US dollar does not have the same “power” everywhere, which is why travellers from high-income countries often feel wealthy in places like Southeast Asia. When you compare Luxembourgish prices to Vietnamese prices, for example, everything feels incredibly cheap. In Vietnam, one euro might get you a full meal. In Luxembourg, that same euro would not even buy you a coffee anymore. Suddenly, luxury, comfort and quality feel affordable.
But here’s where exchange rates enter the picture. Sometimes your holiday feels more expensive even though prices in the destination country haven’t changed at all. What changed is the value of your currency. If it becomes weaker, you need more of it to buy the same things abroad. If the destination currency becomes stronger, your money doesn’t stretch as far. Interest rates, inflation, political decisions or global crises can all influence exchange rates. And when they move in an unfavourable direction, your holiday suddenly feels more expensive.
The psychology behind it
However, exchange rates are not only about economics; they are also about psychology. When you travel from a very expensive country like Luxembourg to a slightly cheaper one, everything feels like a bargain. But cheaper than at home does not mean cheap, or necessary. Little by little, those purchases add up.
In the end, your holiday can feel more expensive for different reasons. Exchange rates are not just abstract numbers on financial news; they directly affect how far your money takes you. And sometimes, the real mystery is not the economy, but how we react to it.
Powerful currency: good or bad for a country?
A strong currency allows imported goods from other countries to become cheaper. Lower costs rhyme with lower inflation and a stable economy. As the dollar declined by 14% compared to the euro in 2025, Apple discounted its MacBooks in the European Union while maintaining the price in the USA.
While a strong currency makes spending money abroad cheaper, it hurts the wallet of tourists and exporters. An appreciating currency makes products more expensive for foreign buyers. However, there is a risk if the value of a currency keeps falling: inflation flies. At some point, the population prefers to keep their money in a foreign currency. For example, people in Argentina use the dollar because their peso keeps weakening every day.
How to avoid overpaying
We’ve put together a few tips to help you avoid high exchange rates and unnecessary fees while enjoying your well-deserved vacation. Check your bank’s foreign transaction and ATM fees before you travel. A good exchange rate means little if extra charges apply on top. Keep an eye on the exchange rate in the weeks before departure. If your currency strengthens, it may be worth exchanging earlier. And if possible, skip airport exchange counters. Convenience is expensive. A little planning goes a long way.
Why do neobanks have a better rate
For young people studying abroad, travelling, or receiving payments from overseas clients, foreign exchange costs quietly add up. A 1 to 2% difference in exchange rates may look trivial on a single transaction, but repeated across months of international transfers, it becomes meaningful. The number of digital nomads has grown sharply. According to an MBO Partners survey, it increased by more than 147% in the USA between 2019 and the early 2020s, with over 40 million people worldwide now working location independently.
Neobanks like Wise, Revolut and N26 have deliberately targeted this audience. Rather than profiting from exchange rate margins, they use competitive rates as an acquisition tool and recover costs elsewhere. According to Sopra Steria (2025), traditional banks spend £150–350 to acquire each new customer, whereas neobanks bring that down to £5–15. A current account costs a neobank £40–50 in contrast to £300 for a traditional bank, according to Deloitte and Finlay Research.
Those savings feed directly into the rates customers see. Wise offers the mid-market rate, the rate at which banks trade with one another, and charges a small, clearly disclosed fee. Traditional banks have typically applied a 2 to 4% margin above the mid-market rate, often embedded in the rate itself. In practice, one provider may return €1.00 for every $1.05, while another returns only €0.97.
This could be changing as regulation pushes to regulate hidden fees. Under EU Regulation 2021/1230 and the forthcoming 2026 Payment Services Regulation, providers operating in the EU must disclose currency conversion costs as a transparent percentage markup over the European Central Bank reference rate before any transaction is completed. The rule targets hidden spreads and makes the mid-market rate the public benchmark.
A small recap
Exchange rates shape how far your salary travels, how competitive companies are, and how expensive your holiday feels. Sometimes the reason your trip costs more is hidden in bank spreads. Sometimes it is the strength of your currency. And sometimes it is simply psychology. Understanding these mechanisms does not stop exchange rates from moving. But it does give you one advantage: you know what is really happening when your coffee abroad suddenly feels overpriced.
Read this article on PaperJam:
More articles written by our members on PaperJam:
