01-10-2005, 09:13 PM
The 97-cent weakling
Day by day, your dollar buys fewer and fewer euros or yen. If you think you don't care, just wait. You will.
You might not know a euro from a yuan, and chatter about international currency markets probably makes your eyes glaze over. But if you live in the United States, you care about your dollar and how much muscle it has.
Thatâs because the greenbackâs strength relative to other currencies directly affects your economic life. Currently, with the dollar each day seeming to hit new lows against the European Communityâs euro and Japanâs yen, the news for U.S. consumers is uniformly bad.
Here are the four main ways youâre likely to suffer, and why:
Imported goods will cost more
This is a no-brainer. As the dollar loses value against a particular currency, goods produced in that same country rise in price for anyone buying with dollars.
The price of some goods, such as European wines for which connoisseurs are willing to pay top dollar, has soared more than 45% over the last three years.
Yet the price of other imports remains fairly flat. A BMW car that cost Americans $40,000 when a euro was worth only 82 U.S. cents should by all appearances cost more than $65,000 when the euro fetches $1.36. Yet it doesn't. Contracts that lock in exchange rates (called "hedging") and the ultra-competitive marketplace for luxury cars have kept prices relatively stable.
âSome of the increase has to do with a realignment of global supply and demand, and some of it has to do with the weakness of the dollar,â says Scott Hoyt, an economist with Economy.com. âThe two are difficult to separate."
For at least the time being, while consumer prices generally are higher than they were a year ago, they are not dramatically higher. At least part of the reason is that an increasing share of U.S. imports comes from Asian countries with currencies that have not risen sharply against the dollar. Many of those countries actively intervene to keep their currencies in step with the dollar by buying the greenback in currency markets.
The effect of a weak dollar has been muted so far, Hoyt says, because a major U.S. trading partner, China, has pegged its currency, the yuan, to the dollar through a series of central bank interventions. Should the Chinese let the yuan trade freely, and there are signs they will, you will feel the pinch. Economists, bankers and currency traders believe that the yuan, allowed to float, would rise 15% to 40% against the dollar.
How would that affect you? Wal-Mart alone bought more than $18 billion in goods from Chinese manufacturers in 2004: electronics, clothes, toys. Add 15% to 40% to their prices and you've got an idea.
Prices of goods produced domestically will rise as well
If the effect of a weak dollar on the cost of imports is crystal clear, not so the effect on domestic prices. Thereâs nothing intuitive about this at all. What gives?
As explained by Wake Forest University finance professor Bill Marcum, two motives will drive U.S.-based companies to raise their prices:
First, price increases by foreign competitors give U.S. producers the cover to raise their own prices without suffering a competitive disadvantage. Who wouldnât want to increase the bottom line, especially if it didnât cost anything? Maybe this is a no-brainer after all.
Second, prices will rise domestically to cover the cost of increasingly expensive âimport inputsâ into domestic production. Remember, just because a product is Made in America doesnât mean that all its components are as well.
Interest rates will rise, causing calamity for some
If certain other factors come into play -- including a general dumping of dollars by foreign investors, and the federal governmentâs increased reliance on borrowing to finance the national debt -- the result could be significantly higher interest rates across the board. Many consumers then would find their credit positions had been made more tenuous, in some cases to the point where bankruptcy was the inevitable result.
Wake Forestâs Marcum says the conditions for this ânightmare scenarioâ are far from being met and may well be prevented by Americaâs continuing status as the worldâs safest haven for investment. âFrom the safe-market perspective, thereâs no place else to put money,â Marcum says.
The joker in the deck is China, which has intervened to keep its currency, the yuan, in balance with the dollar. However, Beijing has signaled its intention to decouple the currencies for competitive reasons, and when it does, the trillions of dollars in U.S. Treasurys it holds will begin to lose value.
To minimize that loss, Marcum says, the Chinese almost certainly will sell off some of their U.S. holdings. The question is: How much and how fast, and will the other Asian countries that have copied Chinaâs dollar-propping moves also ape its move out of dollar-denominated investments?
If there is a stampede away from greenbacks, and other âperfect stormâ conditions develop, Marcum says he would not be surprised to see mortgage rates rise by two full points over the next 24 to 30 months. The rate increase would be more exaggerated with riskier types of loans, and credit card rates could be expected to rise sharply.
For consumers who already are overextended, the consequences could be dire. âIf theyâre maxed out on their credit cards and home-equity loans and are barely making their monthly payments, this could put them over the topâ into insolvency, Marcum says.
Benefit of a weak dollar will be delayed
The benefits U.S. exporters are supposed to reap from the weak dollar wonât begin to be felt for a year or so. Thatâs because much of international trade is governed by long-term contracts and because many imports are of the âintraâ variety, meaning theyâre supplied by foreign-based subsidiaries of U.S. companies.
âIf I find a good supplier for bobble head dolls, I lock him into a long-term contract because I can get a better price that way,â Marcum explains. âThen if the dollar takes a beating, I still have to buy those bobble head dolls.â
Meanwhile, itâs estimated that âintraâ purchasing accounts for as much as 50% of U.S. trade. Obviously, itâs harder to abandon a foreign supplier whoâs a member of the corporate family than it is one who is unrelated.
It could take two to three years for long-term contracts to expire and for intra purchasing to loose its luster. In the meantime, the trade deficit will get worse, not better, and the widely anticipated U.S. exporting boom, with an increase of jobs in the sector, will remain on hold.
Day by day, your dollar buys fewer and fewer euros or yen. If you think you don't care, just wait. You will.
You might not know a euro from a yuan, and chatter about international currency markets probably makes your eyes glaze over. But if you live in the United States, you care about your dollar and how much muscle it has.
Thatâs because the greenbackâs strength relative to other currencies directly affects your economic life. Currently, with the dollar each day seeming to hit new lows against the European Communityâs euro and Japanâs yen, the news for U.S. consumers is uniformly bad.
Here are the four main ways youâre likely to suffer, and why:
Imported goods will cost more
This is a no-brainer. As the dollar loses value against a particular currency, goods produced in that same country rise in price for anyone buying with dollars.
The price of some goods, such as European wines for which connoisseurs are willing to pay top dollar, has soared more than 45% over the last three years.
Yet the price of other imports remains fairly flat. A BMW car that cost Americans $40,000 when a euro was worth only 82 U.S. cents should by all appearances cost more than $65,000 when the euro fetches $1.36. Yet it doesn't. Contracts that lock in exchange rates (called "hedging") and the ultra-competitive marketplace for luxury cars have kept prices relatively stable.
âSome of the increase has to do with a realignment of global supply and demand, and some of it has to do with the weakness of the dollar,â says Scott Hoyt, an economist with Economy.com. âThe two are difficult to separate."
For at least the time being, while consumer prices generally are higher than they were a year ago, they are not dramatically higher. At least part of the reason is that an increasing share of U.S. imports comes from Asian countries with currencies that have not risen sharply against the dollar. Many of those countries actively intervene to keep their currencies in step with the dollar by buying the greenback in currency markets.
The effect of a weak dollar has been muted so far, Hoyt says, because a major U.S. trading partner, China, has pegged its currency, the yuan, to the dollar through a series of central bank interventions. Should the Chinese let the yuan trade freely, and there are signs they will, you will feel the pinch. Economists, bankers and currency traders believe that the yuan, allowed to float, would rise 15% to 40% against the dollar.
How would that affect you? Wal-Mart alone bought more than $18 billion in goods from Chinese manufacturers in 2004: electronics, clothes, toys. Add 15% to 40% to their prices and you've got an idea.
Prices of goods produced domestically will rise as well
If the effect of a weak dollar on the cost of imports is crystal clear, not so the effect on domestic prices. Thereâs nothing intuitive about this at all. What gives?
As explained by Wake Forest University finance professor Bill Marcum, two motives will drive U.S.-based companies to raise their prices:
First, price increases by foreign competitors give U.S. producers the cover to raise their own prices without suffering a competitive disadvantage. Who wouldnât want to increase the bottom line, especially if it didnât cost anything? Maybe this is a no-brainer after all.
Second, prices will rise domestically to cover the cost of increasingly expensive âimport inputsâ into domestic production. Remember, just because a product is Made in America doesnât mean that all its components are as well.
Interest rates will rise, causing calamity for some
If certain other factors come into play -- including a general dumping of dollars by foreign investors, and the federal governmentâs increased reliance on borrowing to finance the national debt -- the result could be significantly higher interest rates across the board. Many consumers then would find their credit positions had been made more tenuous, in some cases to the point where bankruptcy was the inevitable result.
Wake Forestâs Marcum says the conditions for this ânightmare scenarioâ are far from being met and may well be prevented by Americaâs continuing status as the worldâs safest haven for investment. âFrom the safe-market perspective, thereâs no place else to put money,â Marcum says.
The joker in the deck is China, which has intervened to keep its currency, the yuan, in balance with the dollar. However, Beijing has signaled its intention to decouple the currencies for competitive reasons, and when it does, the trillions of dollars in U.S. Treasurys it holds will begin to lose value.
To minimize that loss, Marcum says, the Chinese almost certainly will sell off some of their U.S. holdings. The question is: How much and how fast, and will the other Asian countries that have copied Chinaâs dollar-propping moves also ape its move out of dollar-denominated investments?
If there is a stampede away from greenbacks, and other âperfect stormâ conditions develop, Marcum says he would not be surprised to see mortgage rates rise by two full points over the next 24 to 30 months. The rate increase would be more exaggerated with riskier types of loans, and credit card rates could be expected to rise sharply.
For consumers who already are overextended, the consequences could be dire. âIf theyâre maxed out on their credit cards and home-equity loans and are barely making their monthly payments, this could put them over the topâ into insolvency, Marcum says.
Benefit of a weak dollar will be delayed
The benefits U.S. exporters are supposed to reap from the weak dollar wonât begin to be felt for a year or so. Thatâs because much of international trade is governed by long-term contracts and because many imports are of the âintraâ variety, meaning theyâre supplied by foreign-based subsidiaries of U.S. companies.
âIf I find a good supplier for bobble head dolls, I lock him into a long-term contract because I can get a better price that way,â Marcum explains. âThen if the dollar takes a beating, I still have to buy those bobble head dolls.â
Meanwhile, itâs estimated that âintraâ purchasing accounts for as much as 50% of U.S. trade. Obviously, itâs harder to abandon a foreign supplier whoâs a member of the corporate family than it is one who is unrelated.
It could take two to three years for long-term contracts to expire and for intra purchasing to loose its luster. In the meantime, the trade deficit will get worse, not better, and the widely anticipated U.S. exporting boom, with an increase of jobs in the sector, will remain on hold.
narg:
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