After years of unusual strength, the dollar has declined in value compared with other hard currencies–a victim of lower interest rates, a soft stock market and a glut of American imports.
On Monday, the dollar bought 119 Japanese yen. A year ago, a dollar was worth 131 yen. And the British pound, which is worth $1.60, was worth just $1.45 a year ago.
The change means the world has become a more expensive place for Americans, but the U.S. has become a cheaper place for everyone else. Here is a look at how the dollar’s decline affects some sectors of the U.S. economy.
Travel
Rattled by threats of terrorism and a weak economy, would-be travelers to Europe have another reason to stay home: a weak dollar corrodes buying power.
Ireland, for example, was a true bargain a year ago when the euro was worth 89 cents. But at the current $1.05, nearly everything, from a pint of Harp to a ride in a taxi, costs 18 percent more.
And naturally, the Irish visitor to Chicago sees prices tumbling when the euro is strong. A tourist from Dublin, for example, would pay 15 percent less for a pint of Goose Island.
Some domestic travel agents report that clients are making adjustments to their travel plans based on the weakening dollar. The national clients of Escapes Unlimited, a travel agency in Tustin, Calif., often adjust travel plans to seek out friendlier exchange rates, according to owner Roe Gruber.
“We’re seeing more of a trend toward Central and South America,” Gruber said.
Gruber also has had an upsurge in bookings to Argentina. “That’s where the dollar is strong because of their own economic problems. It used to be a pretty expensive destination, but not anymore.”
But there are signs that the Europeans are fighting back.
H. Juergen Krenzien of Paul L. Klein Travel in Chicago sees the European travel industry making special efforts to lure Americans.
“Hotels are running all kinds of specials,” he said. “There are bargains to be had. A lot of those specials have gone beyond March and have been extended into April and early May.”
— Robert Cross
Manufacturing
For the nation’s beleaguered manufacturers, the declining dollar offers a welcome bit of good news.
As the dollar falls, manufacturers’ products become more competitive overseas. Indeed, exports could show signs of greater strength as early as the first quarter, said Rob Hoffman, director of development at World Business Chicago, a non-profit group partly funded by the city.
“As a major exporter, Illinois should do reasonably well, particularly in equipment,” Hoffman said, pointing to companies such as Peoria-based equipment-maker Caterpillar Inc. and Moline-based farm-equipment manufacturer Deere & Co.
Many smaller firms that do not sell products overseas also will benefit because of an uptick in exports for the larger companies they supply.
A boost in exports could help jump-start the economy. But the impact probably will not last as long as it would have in years past, when manufacturers kept larger inventories.
Now that most manufacturers reorder parts more quickly, those buying components from other countries could quickly see cost increases on imports offsetting the gains from stronger exports.
More U.S. manufacturers are making products overseas rather than exporting, partly because it is more cost effective for production, and partly because the dollar was strong for so long that they preferred to deal in the currencies of the countries where they sold their goods.
Automotive supplier BorgWarner Inc. in Chicago does most of its business in local currencies, so the impact of a weakening dollar is not greatly affecting the company, said spokeswoman Mary Brevard.
— Melissa Allison
Imports
If your taste runs to Italian leather jackets, BMW sport coupes and the latest plasma TV from Japan, your world is becoming more expensive. Most imported items, particularly luxury goods, grow more expensive when the dollar falls.
“A weak dollar is bad news for consumers because it makes anything imported more expensive and anything exported cheaper and more in demand,” said George Parker, a professor of finance and management at Stanford University’s School of Business.
“Mercedes, Lexus, Gucci, Bang & Olufsen–expect luxury apparel, electronics and automobiles to go up,” Parker said.
“It’s the consumer electronics companies such as Circuit City and Best Buy, which tend to sell imported products, that may have to raise prices,” he said.
In some instances, however, competitive factors may prevent retailers from raising prices. While that is good for consumers, it saps strength from many businesses.
Low-end apparel, for example, is in such a competitive market that price increases may not be possible.
“Businesses will see an increase in costs from imports they are bringing in,” said Carl Steidtmann, chief economist for Deloitte Research in New York.
The falling dollar does no good in holding down gasoline prices, even though half the petroleum that Americans consume is imported.
“Oil is traded in dollars everywhere, so it makes it cheaper for everyone but us,” he said.
On the other hand, if something is made in America, it’s getting cheaper compared with its foreign rivals.
Edward Richardson is the CEO of Richardson Electronics Ltd. in LaFox, in Kane County. His company makes electronic components for manufacturers of radio frequency and wireless communications equipment.
“People in Europe and Japan can buy more of our products now,” Richardson said.
— Robert Manor and Lisa Song
Currency trading
Foreign exchange trading is a vast market, with trillions of dollars moving around the world daily chasing profit and fleeing fear.
The Chicago Mercantile Exchange Inc., a premier venue for people who want to bet that one currency will rise in comparison with another, offers futures trading in the euro and the currencies of 12 countries.
Lately, the shouting in the pits has grown louder, and the trading screens have been flashing more frequently.
“We have seen a pickup in volume,” said Rick Sears, a Merc managing director in charge of currency products. He said that trading in futures contracts rises as the dollar becomes more volatile.
On some days, 115,000 contracts have changed hands, Sears said. Before the dollar declined, he said, an ordinary day might have seen a volume of 90,000 or fewer contracts.
Alan Palmer, an independent trader at the Chicago Board of Trade, said he believes the Bush administration overestimated the strength of the dollar. While that isn’t causing serious problems now, Palmer said, it would be a problem if the dollar continues to fall sharply.
“Once the dollar loses 20 percent, that’s when there will be some concern,” said Palmer, who is pessimistic.
There are signs that some people are already trying to cash in on the decline of the dollar. The strategy isn’t difficult to understand: Sell U.S. stocks, which will be worth less as the dollar falls, and buy foreign stocks, which will gain value as their currencies strengthen.
For the first 11 months of last year, international equity funds saw net inflows of $6 billion, according to statistics from the Investment Company Institute, a trade group for the mutual fund industry. During the same period, domestic stock funds saw an outflow of $9.6 billion.
Brian Mattes, a spokesman for the Vanguard Funds, strongly cautioned people not to try a play against the dollar.
“To base investment on the direction of the dollar is not investing,” he said. “It is speculating.”
— Robert Manor
