The U.S. dollar
fell to
a new low against the euro on Tuesday, thanks to
more
bad news about home sales. One American greenback is
now worth about
0.71 euros, or 0.49 British pounds. Five years ago,
the dollar and the euro were about the same in value,
which means that a Roman holiday has gotten
significantly more expensive. But
continental vacations aside, how does the weak
dollar affect the average Joe?
With higher prices on almost everything imported from
abroad. As our currency loses value, a dollar buys less
and less from manufacturers in other countries. Because
the euro has been so strong, this effect is especially
pronounced when it comes to European imports: All things
equal, a pair of eyeglass frames from a European
designer that cost about 150 euros—or $192—last
September would now go for $211 because of the soft
dollar. This puts foreign businesses at risk of losing
American customers to domestic competitors; some end up
lowering their prices—and losing profits—as a result.
But those businesses still need to make up for the
shortfall, so they cut back in other ways. A carmaker
like Audi or Volkswagen, for example, might start
offering fewer models in the United States or stripping
some bells and whistles from its vehicles.
The weak dollar can hurt you even if you stick to
buying American. Domestic manufacturers can start to
raise their own prices, once the cost of European
products starts to go up. The euro sticker shock also
applies to American-made products that come from
European raw materials, like J. Crew's cashmere sweaters
or Cole Haan shoes made from Italian leather. Wal-Mart
and Target shoppers probably won't need to worry for the
time being, though. Much of what you buy from those mass
merchants—toys, stereos, T-shirts—comes from Asian
countries where currency values are more or less pegged
to the U.S. dollar. A dollar will still be worth about
7.5 Chinese yuan no matter how much value it loses
relative to the euro. The big-box retailers also tend to
have supplier contracts that are written in U.S.
dollars, so there's less currency risk.
But temporary protections like artificially low
prices and contracts in American currency can't go on
forever if the dollar keeps weakening. Global companies
will see their U.S. businesses shrink—not because
they're selling fewer products, but because $1 million
in sales is worth less than it used to be. Businesses
will need to recoup their losses at some point by
raising prices. If oil companies had to raise prices for
that reason, the effects would be felt throughout the
U.S. economy. Eventually—if too many things start
costing just a bit more—we could have inflation on our
hands.
There is at least one way that a weakened dollar
helps American consumers. Armed with strong currency,
more Europeans are
snatching up property in chic neighborhoods around
the United States. This influx of capital could
stabilize local housing markets.
