The official Peruvian currency is the Nuevo Sol, but many businesses accept US dollars as well. We recommend exchanging money at banks (rather than casas de cambio) or using ATMs to acquire cash. If you bring cash, make sure that the bills you bring look crisp and brand new with no tears, marks, or wear. Otherwise, they will not be accepted. This is no joke. We have seen many people come down with US currency bills that they thought were good, only to get turned down at the banks and money exchanges.
ATMs in Peru dispense both Peruvian Soles and US dollars. Be aware that when using ATMs, fees are often higher for foreign cards, and your bank may also charge an international-use fee each time you use your card. Also, it should be noted that while some (usually high-end) businesses in cities will accept credit and debit cards, they may also add a 5-7% surcharge to your bill.
Travelers cheques are another option. However, the exchange rate is much better for US dollars. You may exchange them at banks.
Whatever choice you make, ask for small bills (“pequenas billetes”) as breaking large bills can be very difficult. Also, be sure to check for counterfeit bills. The easiest way to do this is to hold the bill up to the light and make sure you see the watermark.
Small tips are always appreciated in Peru, and a great way to make a good friend.