A Better Way to Think About Exchange Rates and Tourism
Why origin-weighted exchange rates distinguish FX pressure from real tourism affordability
I. Concept & Motivation
1. Exchange Rates and the Geography of Tourism
Exchange rates are frequently cited as a driver of tourism demand, typically at the level of national currencies. Such comparisons are convenient, but they abstract from how tourism decisions are actually made.
Travellers do not respond to currencies in isolation. They respond to how affordable a particular destination appears, relative to alternatives, and relative to the currency they earn and spend in. Those perceptions are shaped first by exchange-rate movements, and only later by how far local prices adjust.
The Destination FX framework is designed to capture both stages of that process, taking into account the different origin markets that shape each destination’s inbound tourism.
2. Why this matters now
In the immediate post-pandemic period, tourism growth was shaped primarily by reopening timelines, pent-up demand, and the gradual restoration of capacity. In that environment, exchange rates mattered—but they were rarely decisive.
By 2026, the context has shifted. International travel has largely normalised. What remains are:
relative prices
substitution between comparable destinations
short-term competitiveness shocks, including geopolitical and reputational effects
In this setting, exchange rates no longer sit quietly in the background. They act as a sorting mechanism, redistributing demand across destinations with similar appeal. Some destinations gain momentum; others lose ground—even when overall travel demand is stable.
This is where the distinction between FX pressure and real FX affordability becomes important.
3. The intuition: the “first-order shock”
Exchange rates represent the first price signal travellers encounter when pricing a trip.
Before hotels reprice, before inflation appears in consumer-price indices, and before business margins adjust, travellers already see the effect of currency movements when converting prices into their home currency. That immediate translation is what economists describe as a first-order shock.
Because it operates at the point of comparison—when destinations are weighed against one another—this FX signal often aligns closely with short-term shifts in arrivals. It captures changes in perceived value before slower-moving forces have time to respond.
By contrast, inflation effects tend to:
lag exchange-rate movements
be partially absorbed by margins rather than passed on in full
vary widely across segments and service types
For these reasons, nominal, FX-based measures provide a cleaner and more timely indication of near-term pressure on tourism demand than inflation-adjusted alternatives. They explain why currency movements can trigger rapid shifts in travel patterns even when on-the-ground prices have yet to change.
4. What is the Destination FX Affordability Index?
The Destination FX framework is designed to assess how exchange-rate movements shape tourism competitiveness at the destination level, taking into account where visitors come from and the relative importance of different source markets.
It does so by distinguishing between two related but distinct effects. The first captures the immediate pressure that currency movements exert on perceived affordability at the point of booking. The second reflects how much of that pressure translates into actual affordability once local prices adjust.
Together, these measures indicate whether a destination has become more or less attractive, in currency terms, for the markets that matter most to its inbound tourism—and whether that shift is likely to be transient or sustained.
5. FX pressure and real affordability
The Destination FX framework distinguishes between two related but distinct channels through which exchange rates affect tourism outcomes.
FX pressure (P-Dfx) captures the immediate impact of exchange-rate movements on perceived affordability. It is based on nominal, origin-weighted exchange rates and reflects the price signal travellers see when comparing destinations or converting prices into their home currency. P-Dfx therefore measures the directional pressure that currency movements place on tourism demand—where FX is creating a tailwind, and where it is acting as a headwind.
FX affordability (A-Dfx) adjusts that nominal signal for relative inflation between origin markets and the destination. By accounting for how local prices evolve, it provides a proxy for realised affordability—the extent to which FX pressure is actually transmitted into lower (or higher) prices on the ground. A-Dfx is therefore more closely aligned with cost competitiveness once domestic prices, wages, and margins have had time to adjust.
6. When inflation overwhelms FX: the case of Argentina
Despite Argentina’s peso depreciating against regional currencies, outbound travel surged, with residents increasingly opting for international trips over domestic holidays—most notably to Brazil. The driver was not favourable exchange rates abroad, but domestic inflation rising faster than the currency was allowed to adjust, rendering local tourism comparatively expensive.
A government-managed crawling peg, which limited monthly depreciation, further distorted price signals by keeping the official exchange rate artificially strong. In effect, foreign travel was subsidised relative to domestic consumption.
In such cases, inflation does not lag exchange rates; it overwhelms them. Argentina’s experience highlights the limits of FX-based signals in economies where price controls and inflation dynamics disrupt the normal transmission from currency movements to on-the-ground prices.
(A fuller discussion appears in my Global Tourism 2025 review.)
II. The Dfx Framework
7. Methodology: adapting the trade-weighted exchange rate
The Destination FX (Dfx) framework draws on the same logic used to calculate a trade-weighted exchange rate.
Instead of trade partners and export weights, however, it applies this approach to tourism by using:
inbound origin markets
their share of international arrivals
bilateral exchange rates between origin currencies and the destination currency
In effect, inbound tourism exposure is treated in much the same way that trade-weighted indices treat export exposure.
FX pressure: P-Dfx
The first component of the framework, P-Dfx (FX pressure), captures the nominal exchange-rate signal faced by travellers.
On a monthly basis, P-Dfx for a given destination is calculated by aggregating bilateral exchange-rate movements across origin markets, weighted by each market’s share of international overnight arrivals in a fixed base year.
Formally, P-Dfx is constructed as a geometric weighted average of bilateral exchange-rate ratios between the destination currency and each origin currency. Origin weights are held constant (currently fixed at 2024 shares) to isolate exchange-rate effects and avoid circularity from changes in visitor composition. Effectively this a nominal effective exchange rate (NEER) using tourism weights.
The index is calculated as follows:
where
∏ is product of the bracketed term acoss i origin markets
d denotes the destination
i denotes an inbound origin market
ed is the exchange rate of the destination currency against the US dollar (monthly average)
ei is the exchange rate of the origin currency against the US dollar (monthly average)
wi is the share of total international overnight arrivals accounted for by origin i in a fixed base year (currently 2024)
This measure captures how currency movements alter perceived affordability for a destination’s actual inbound market mix.
Real affordability: A-Dfx
The second component, A-Dfx (FX affordability), adjusts the nominal FX signal for relative inflation between origin markets and the destination.
By incorporating inflation differentials, A-Dfx provides a proxy for realised affordability—the extent to which FX pressure translates into lower or higher prices once local costs, wages, and margins adjust.
In practical terms, A-Dfx applies an inflation adjustment to the same origin-weighted FX structure used in P-Dfx, preserving the destination-level and origin-weighted nature of the index while accounting for price dynamics. Effectively this a real effective exchange rate (REER) using tourism weights.
The index is calculated as follows:
where
Pd is the Price Level of the destination against the US dollar (annual average) indexed to 2019=100
Pi is the Price Level of the origin against the US dollar (annual average) indexed to 2019=100
Normalisation and reporting
Both P-Dfx and A-Dfx are normalised to a 2019 = 100 baseline and reported on a year-on-year basis, which helps to minimise seasonal distortions and facilitate comparison across destinations.
An increase in either index indicates that the destination has become more favourable in FX terms for its inbound visitor mix. A decline indicates a deterioration. The distinction lies in interpretation: P-Dfx reflects short-term FX pressure, while A-Dfx reflects inflation-adjusted affordability.
8. How to interpret the index
If a destination records a +4% P-Dfx reading in Q1 2026, this indicates that—holding the origin mix constant—exchange-rate movements made the destination roughly 4% cheaper in nominal FX terms for its inbound visitors compared with the same period a year earlier.
It does not imply that:
prices at the destination fell by 4%
arrivals should rise by 4%
exchange rates alone explain changes in tourism demand
Reading P-Dfx and A-Dfx together
P-Dfx and A-Dfx capture different stages of the same transmission mechanism. P-Dfx reflects the initial price signal travellers face when converting currencies; A-Dfx reflects whether that signal survives domestic inflation and cost pressures. Read together, they distinguish between destinations experiencing a structural FX tailwind, those enjoying only temporary currency relief, and those facing a genuine competitiveness shock. This distinction is critical in a normalised tourism environment, where demand is increasingly redistributed rather than created.
FX Headwinds : P-Dfx ↓ / A-Dfx ↓
Both FX pressure and real affordability move against the destination. These markets face the strongest competitiveness shock.
Typical outcomes: declining arrivals, loss of share, ranking slippage.
Examples: Thai destinations (2025)
Illusory FX Gains : P-Dfx ↑ / A-Dfx ↓
Nominal FX signals look favourable, but inflation absorbs the benefit. FX pressure may not translate into real affordability.
Typical outcomes: muted arrivals response, short-lived gains.
Examples: Argentinian destinationsResidual Affordability: P-Dfx ↓ / A-Dfx ↑
FX momentum has turned, but affordability remains elevated relative to historical reference points. Demand can remain resilient, especially in reopening or structurally cheap markets.
Typical outcomes: slowing growth, but no collapse.
Examples: Saudi DestinationsStructural FX Tailwind: P-Dfx ↑ / A-Dfx ↑
FX momentum and inflation-adjusted affordability move in the destination’s favour. These are the strongest cases for sustained demand gains.
Typical outcomes: rising arrivals, improving competitiveness, ranking gains.
Examples: Vietnam (2025), parts of Japan post-reopening
This framework helps explain why destinations with similar headline FX movements can experience very different tourism outcomes. FX pressure shapes near-term shifts at the margin; FX affordability determines whether those shifts persist.
In short, P-Dfx tells you where pressure is building; A-Dfx tells you whether it lasts.
III. Results: The Global FX Landscape in 2025
9. The Destination FX Landscape in 2025
Viewed globally, FX conditions in 2025 created a highly uneven affordability landscape across tourism destinations.
The map below shows P-Dfx—the origin-weighted FX pressure faced by destinations over the year. It captures how exchange-rate movements altered the perceived cost of destinations for their inbound market mix, before domestic inflation and price adjustments are taken into account.
This is a measure of FX pressure, not realised affordability. Whether these currency signals translated into sustained affordability gains depends on how local prices evolved—an issue explored through the A-Dfx results that follow.
From Geography to Distribution: How Big Were the Moves?
The map above shows where FX pressure occurred.
This distribution below shows how large those moves were — and which destinations they affected most.
Each bubble represents a destination.
• Position along the horizontal axis reflects FX pressure (P-Dfx) in 2025.
• Bubble size reflects international overnight arrivals.
• Colour denotes region.
The clustering reveals that FX shifts were not marginal. Several high-volume destinations experienced double-digit currency tailwinds, while others faced material headwinds. The distribution makes clear that 2025 was characterised by dispersion — not uniform currency conditions.
For an interactive version of the graphic below please visit my Linkedin Newsletter
From FX pressure to realised affordability: A-Dfx in 2025
FX pressure is only the first step. Whether currency movements translated into sustained affordability gains depended on domestic inflation and price dynamics.
The map below shows A-Dfx, which adjusts origin-weighted FX movements for relative inflation between destinations and their inbound markets. It provides a proxy for realised affordability—highlighting where FX tailwinds persisted after prices, wages, and margins adjusted, and where inflation largely erased them.
Read alongside the P-Dfx map, A-Dfx distinguishes destinations experiencing temporary FX pressure from those enjoying durable, inflation-adjusted affordability gains.
The gap between the two identifies destinations where inflation absorbed FX tailwinds, while alignment between them points to sustained competitiveness gains.
Which FX Moves Actually Stuck? Realised Affordability in 2025
FX pressure alone does not determine competitiveness.
This distribution below shows realised, inflation-adjusted affordability (A-Dfx).
Here, the horizontal position reflects how FX movements translated into sustained price competitiveness after accounting for domestic inflation. Bubble size again reflects arrivals, highlighting which large destinations retained — or lost — affordability.
Comparing this distribution with the P-Dfx view reveals where inflation erased currency gains and where affordability improvements proved durable.
For an interactive version of the graphic below please visit my Linkedin Newsletter
FX Pressure, Inflation, and Tourism Outcomes in 2025
The table below reconciles FX pressure (P-Dfx) with realised affordability (A-Dfx) and observed tourism outcomes. Ranked by FX pressure, it shows where nominal currency moves translated into sustained affordability—and where domestic inflation largely neutralised the FX signal
Ranked by FX pressure, it highlights where currency movements created strong affordability signals—and where inflation prevented those signals from translating into sustained competitiveness gains.
Destinations with the strongest FX tailwinds in 2025 did not necessarily experience sustained affordability gains or large increases in arrivals once domestic inflation was taken into account.
IV. Interpretation & Mechanisms
10. FX levels, reference points, and Japan’s post-reopening surge
The Dfx framework focuses primarily on year-on-year changes, which are useful for identifying short-term shifts in momentum. In some cases, however, the level of affordability relative to a historical reference point matters just as much—particularly during reopening phases.
Japan provides a clear example.
FX conditions in 2025 appeared relatively stable. Year on year, both P-Dfx and A-Dfx showed small deteriorations in perceived and actual FX affordability across the Japanese destinations. However, arrivals at the 14 Japanese destinations increased 12.7% on average ranging from 5% to 27%. Viewed in isolation, this might suggest that FX were no longer playing a meaningful role in shaping inbound demand for Japan.
That interpretation is misleading.
When Japan reopened to international tourism in 2023, most visitors’ last point of reference was pre-pandemic pricing and exchange rates. Against that benchmark, Japan appeared exceptionally affordable—and remained so for an extended period.
As shown below, inflation-adjusted FX affordability (A-Dfx) for both Tokyo and Hokkaido remained roughly 15–35% more favourable than in 2019 throughout the post-reopening period. Even as year-on-year FX gains moderated in 2025, the level of affordability remained structurally elevated.
Japan entered the recovery phase with a persistent FX affordability tailwind, not a temporary one.
Nominal FX pressure (P-Dfx) explains timing rather than scale. Periods of renewed yen weakness aligned with renewed spurts in demand, while stabilisation in 2025 coincided with a slowing—but not reversal—of growth.
P-Dfx helps explain why momentum fluctuated.
A-Dfx explains why demand stayed high.
The arrivals data reinforce this distinction.
By the end of 2025:
Tokyo’s international overnight arrivals averaged 81% above 2019 levels, pushing up its Global Rank from 7th in 2019 to 1st in 2025
Hokkaido stood 68% above its pre-pandemic benchmark. Its Global Rank at 21 in 2025 up from 38 in 2019
These outcomes are difficult to explain using year-on-year FX movements alone. They make far more sense when viewed through the lens of elevated affordability levels relative to travellers’ historical reference points.
What this illustrates
Japan highlights an important nuance in interpreting FX and tourism:
P-Dfx explains changes at the margin
A-Dfx levels shape the scale and persistence of demand
During the reopening phase, travellers anchored their expectations to pre-pandemic prices, not last year’s FX. When affordability remains structurally improved relative to that anchor, demand can stay elevated even as FX momentum fades.
This distinction becomes less visible in mature, fully normalised markets—but it is decisive during periods of regime change.
11. FX and cross-destination substitution: a Thailand–Vietnam example
When one destination becomes cheaper relative to its peers, travellers do not stop travelling — they switch destinations. This process creates cross-destination substitution pressure, whereby some destinations gain arrivals while others lose momentum, even if overall international travel demand is broadly unchanged. It also helps explain why destination rankings can shift materially from one year to the next without any global shock.
A clear regional example emerged in 2025, when comparisons of inbound performance in Thailand and Vietnam frequently noted that Thailand was lagging. Explanations ranged from exchange-rate effects to geopolitical tensions along Thailand’s borders, as well as reputational concerns linked to scam-centre-related kidnappings that reportedly deterred some Chinese travellers.
Isolating the FX channel for two close regional peers — Bangkok and Ho Chi Minh City — helps clarify the role played by relative affordability.
In 2025:
Bangkok’s international arrivals fell 5.4% year on year
Ho Chi Minh City’s arrivals rose 22.4%
The FX backdrop moved in opposite directions:
Bangkok experienced negative FX pressure, with P-Dfx falling around 5%, and real affordability (A-Dfx) deteriorating by roughly 3%
Ho Chi Minh City saw positive FX pressure, with P-Dfx improving by about 3%, and A-Dfx rising by around 2%
Taken together, this implies an FX affordability differential of roughly 5 percentage points on a realised (A-Dfx) basis, and closer to 8 percentage points on a pressure (P-Dfx) basis — a meaningful divergence between two otherwise comparable urban destinations.
Exchange rates clearly do not explain the entire performance gap. Geopolitical factors and reputational shocks matter, particularly for China-sourced demand. FX affordability is, however, the only factor among those commonly cited that can be measured consistently and compared across destinations. As such, it provides a quantifiable explanation for part of the observed divergence, while other influences remain largely qualitative.
In a normalised tourism environment, it is these relative price signals — rather than absolute demand shocks — that increasingly shape short-term shifts in destination performance and rankings.
12. Transmission speed: why some destinations respond faster
FX tailwinds do not translate into arrivals uniformly. The speed of transmission varies markedly across destinations, depending on geography and travel behaviour.
FX effects tend to show up more quickly in destinations characterised by:
high land-border exposure
short-haul travel dominance
frequent, low-commitment trips
Border destinations and nearby secondary cities often respond first, as travel decisions can be adjusted rapidly and repeatedly. A small shift in relative prices can be enough to redirect weekend travel, shopping trips, or short holidays.
By contrast, long-haul and flight-dependent destinations typically respond with a lag. Longer planning horizons, higher upfront costs, and fixed travel windows slow the transmission of FX-driven affordability into realised arrivals.
As a result, while the Dfx framework captures the direction and strength of FX affordability pressure, geography and access determine how quickly that pressure translates into observed changes in arrivals.
13. Dominant Currency Pricing (DCP) and USD-anchored destinations
In some destinations, tourism services are priced in a dominant currency—most often the US dollar—rather than the local currency. Where this is the case, the impact of bilateral exchange-rate movements is muted, and affordability becomes more sensitive to USD cycles than to movements in the destination’s own currency.
For travellers, this means that perceived affordability responds primarily to changes in the US dollar relative to their home currency, not to shifts in the local exchange rate. In effect, the destination is partially insulated from its own currency movements.
Several destinations exhibit strong characteristics of dominant-currency pricing. Dubai, the Maldives, Seychelles and Cancun are clear examples. In these markets, resort accommodation, tour packages and ancillary services are commonly priced and sold in US dollars, rendering tourism prices effectively USD-denominated. Such destinations also tend to be resort-heavy, long-haul, and dominated by global hotel chains and international tour operators.
There is a structural reason for this pricing behaviour. Many resort-oriented destinations rely heavily on imported inputs—ranging from food and beverages to construction materials, energy, and specialised labour—much of which is priced in US dollars. Dollar pricing helps operators align revenues with cost structures and manage exchange-rate risk.
For the Dfx framework, the implication is clear. In USD-anchored destinations, P-Dfx and A-Dfx signals derived from local currencies may overstate the true degree of FX transmission to tourism prices. In these cases, affordability dynamics are better understood through the lens of USD movements rather than destination-specific exchange rates.
V. Synthesis
Taken together, the evidence points to a simple but often overlooked conclusion: exchange rates matter most for tourism not as a driver of global demand, but as a mechanism for reallocating that demand across destinations.
In a normalised travel environment, exchange-rate movements rarely determine whether people travel. They influence where they go. By separating FX pressure from realised affordability, the Destination FX framework clarifies why some destinations gain momentum quickly, why others sustain those gains, and why rankings can shift meaningfully even in the absence of global shocks.
P-Dfx captures the immediate signal travellers face when comparing destinations in currency terms, helping to explain short-term momentum and substitution at the margin. A-Dfx captures whether those signals persist once domestic inflation and price dynamics are taken into account, shaping the scale and durability of tourism outcomes. Read together, the two measures distinguish between structural FX tailwinds, transient currency effects, residual affordability from earlier moves, and outright competitiveness headwinds.
The framework also helps reconcile several seemingly contradictory outcomes observed in 2025. Some destinations experienced strong FX pressure without sustained tourism gains, as inflation absorbed much of the benefit. Others continued to attract elevated demand despite fading year-on-year FX momentum, because affordability remained structurally improved relative to pre-pandemic reference points.
The Destination FX framework is not a forecasting model. It does not predict arrivals, nor does it attempt to isolate FX effects from every other influence on tourism demand. Its purpose is narrower but more practical: to explain how exchange-rate movements reshape relative competitiveness across destinations, and why those shifts increasingly matter in a post-recovery world.
Final thought
Exchange rates do not operate in isolation, and they do not determine tourism outcomes on their own. But in a world where travel demand has normalised and destinations increasingly compete at the margin, they have become a more decisive source of competitive advantage — or disadvantage — than they were during the recovery phase.
By distinguishing between FX pressure and realised affordability, and by measuring both at the destination level using actual origin markets, the Destination FX framework makes visible a set of forces that are already reshaping tourism flows, rankings, and substitution patterns.
As recovery gives way to competition, understanding how exchange rates work matters more than simply knowing where they move.