Currently in Egypt and they just asked us to pay in USD cash for an added activity but, not being American, we don't have USD. We have the local currency and the ability to get that out at ATMs, but no way to access foreign currency. So annoying but they accepted local in the end.
No, it's fairly common in many countries. Foreign currencies (namely USD and EUR) are a lot more stable and people prefer that.
USD was the unofficial main currency for any large purchases (like a car or a house) in the Soviet union and for several years after its collapse.
In addition to the stability, they might also be trying to avoid paying currency conversion fees themselves. They are going to export the profits in dollars, and they’d rather you pay the 2% conversion tax than them having to do it.
In this case I don't necessarily think it was a scam because the conversion matched up with what was shown online. However, they clearly wanted both a more stable currency and to not have to convert it themselves. I understand this but there is no way for me to physically attain another currency since I did not bring any into the country and especially wouldn't have USD. They accepted Egyptian pounds in the end.
How does this scam work? Is it based on the assumption that tourist won't know the exchange rate and can be easily (and presumably grossly) overcharged?
Yeah, and it happens all the time. Gift shops and local shops will often charge more to outsiders because a lot of tourists don't realize how much cheaper everything is supposed to be here. Like they'd sell you a water bottle for $1 when its real price is well below 40 cents when calculating the local currency. This isn't even adding the fact that the USD is worth more than its official price here because the Egyptian Pound is constantly crashing.
Someone in the comments said that asking for foreign currencies is common, but it absolutely isn't. Everyone trades with EGP and if they tell you otherwise, then they're jacking up the price so much because you look like a clueless tourist.
As for how many people fall for this, I'd say... A lot.
I don't think its too uncommon for tourist areas to try to pressure tourists to pay with foreign currency that has a favorable exchange rate to the local currency. That way they can make extra money by quoting a figure in USD (or other currency) that they know they can exchange for much more than the regular cost in local currency. If pressured with "I don't have USD, so its either local currency or I go elsewhere" they'll usually give in and accept local currency.
It's funny that I see people saying that they do this to make ekstra money by giving bad exchange rates, while my personal experience in Burma/Myanmar (maaany years ago) was that you got a better price in USD, because the local currency was less stable. So people would charge more if you payed in local, because of the increased risk in holding local currency vs. USD.
I've had this a couple of times. I just told them I only had their local currency or mine, Australian Dollars.
They've then accepted the Australian Dollars.
It's probably a scam, but the amounts haven't been large and what are you gonna do? In one case I needed to hand over some AUD to enter the country! (Cambodia)