What am I not getting about the currency exchange?

First off, the 1.20 is in error. No way, anyway, that you can buy Euro at 1.20. That is about 6% under current market. The rate at the moment is $1.28. That is the interbank rate and is only available to large banks. Your credit card/debit card rate will start about 1% over that mark so it would be about 1.31. When you buy in the US, the rate would marked up by 5 to 10% so it would not be unusual to see a sell rate of $1.38. The key is to find credit cards and debits that do not charge currency conversion fees. However, a 3% fee is about average and is better than you would do in the US. Anytime you want the exchange rate, type Euro in the goggle search engine. As a matter of precaution you should have two debit cards tied to two different accounts so if you need a lot of cash one day, you can max out both cards.

Angela, you didn't use the term "ATM" in your OP. But I think you are talking about making a checking account withdrawal abroad. You didn't mention the likely other-bank ATM transaction charge, as well the possible charge from your bank for using a bank other than theirs. These could easily add up to $8-$12, but are fixed, and not percentages of the transaction. My bank (a different one) has a page (in the US) on the ATM machine and online for setting the maximum daily withdrawal. Note that you are slightly increasing your fraud risk, but I also try to minimize fees. I'll bet they won't accept a $1,000 limit! They call it "protecting you...", but they really mean "protecting the bank!" My bank also has correspondent banks, or partners, in a few European countries, where there is no fixed transaction fee from either bank's ATM network. There is a conversion fee, described in your fine-print booklet. Last month, for the first time in my life, I had my ATM access frozen when I tried to make my second withdrawal in two days in Germany (one of the free withdrawal countries for me.) I was able to call them on Skype and got excellent service. They told me that, like the credit card companies, they want advance notification of travel. Annoying for me, and protection for them ....

That's what the bank told me as of this morning. Maybe they quoted me the rate they get? Who knows. It sounded too good to be true, but I did tell her that when I had called 2 days ago they quoted me 1.34 as the exchange rate.

The current exchange rate I'm seeing is 1.2863 - so perhaps either you or they switched a 0 with an 8. If they did sell you euros at interbank rates with only the $10 fee, take it and buy $1000 if that's what you need. But I wouldn't be surprised if when you show up, the banker tells you something like "oh, that quote was just the interbank rate, we actually charge you a different rate..." The 3% ATM fee is on the high end. So even if your bank charges 5% or so for buying euros here, the cost difference is small. And if you need $1000 on hand when you arrive, by all means buy them here. Most people take some local currency with them. It's just that we discourage needlessly buying lots of cash in advance or currency speculation.

If it is really important to have a large sum exchanged on the first day, set up a second chequing account at a different bank and withdraw the balance you need by ATM in Europe. It could be cheaper and safer than other means of turning dollars into euros. It also adds to your security in case one card is lost/stolen/eaten-by-ATM.

Angela,
It sounds to me like the bank might have given you the sell rate rather than the buy rate. Often banks have one rate when you are buying Euros and a different rate when you are selling Euros. In both cases, they make money.

If my financial institution had a 3% mark up on inter-national transactions, I would have changed places long ago.
My credit union has a 1% fee and almost all ATM machines in Europe charge no fees. I do not take European currency with me from the US but choose to wait until I arrive at my destination airport to use one of the ATMs there and have never gotten stressed out or not gotten what I wanted. If I need more than I get in one ATM withdrawal, I notify the place I am staying that it will take me a couple of days to get all of the cash and offer a credit card as a deposit. This has worked fine for the last 10 years.

Angela, when you say you would "like" to get $1000 right away upon arrival, is this a "want" or a "need"? If you have to make a large payment upon arrival (say, to an apartment), then either get some in advance and pay the extra (in either fees, exchange rates or both) or get a second account so you can withdraw from both accounts upon arrival (what I would do). But, if you don't need this much for a specific reason, it's just as easy to get $500 two days in a row - or even less frequently, if you find you're using your credit cards more, or just not spending that much. As others have said, there are banks that charge less than 3%, and with the Internet it's easy to find them and set up an account before you leave (TD Bank is one; Capital One is also often recommended). Also as noted, European ATM's don't charge fees (I guess there's one, somewhere, not conected with a bank, that does, but I've never seen it; I only use actual bank ATM's). So the only fees you have to worry about are your bank's.

It is important to know that the daily withdrawl limit your bank set may be higher than what the foreign ATM system allows. I have encountered limits of as low was E150.