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As the dollar fell to its lowest level in more than two years against the euro, to $1.3533 in afternoon trading, you may be wondering if there's a silver lining to this seemingly dark foreign exchange cloud. Well, indeed there is: a weaker dollar makes U.S. goods and services cheaper for buyers outside the United States. Of course, price is not the only factor businesses and consumers use when making a purchase decision, but price plays a role. That should help companies like General Electric (NYSE: GE) and Caterpillar (NYSE: CAT) who sell products/equipment to foreign buyers, priced in dollars.
Similarly, U.S. tourist attractions that typically draw "eurozone" Europeans -- citizens whose countries have the euro as their primary currency -- should benefit. Those European travelers will find that their euros will go about 12% further, all other factors being equal: the euro has risen about 12% against the dollar in the last 12 months.
Also, the U.K. is still pound-based, but British travelers to the U.S. will also note their increased buying power: the pound has risen about 13% against the dollar, to $1.9861 in the past year.
Or as one colleague from the U.K. remarked, "It's like the U.S. is one big sale." Hence, it would not be surprising to see tourist dollar totals from Europe increase substantially in 2007, provided neither economy dips into a recession, and of course, barring any geopolitical incidents that may discourage travel.
Who are the losers in the weak dollar environment? Well, for certain, any travelers to the U.K. and eurozone Europe. Simply, they'll quickly find that there's less bang to their buck.
Also, U.S. consumers of foreign goods. Of course, foreign producers have the option of not raising
prices, but many will raise prices to compensate for the dollar's depreciation. Hence, prices could rise on BMWs, Italian suits, French wines and cheeses, and many other items.
So the weak dollar has an upside and a downside. On a more theoretical level, in the quarters and years ahead, the U.S. will have to decide whether it wants a strong dollar (which requires higher personal savings and fiscal restraint) or a weak dollar (which emphasizes economic expansion and a willingness to finance larger budget deficits). We'll examine the U.S.'s likely dollar policy in a future blog.
Also, U.S. consumers of foreign goods. Of course, foreign producers have the option of not raising
prices, but many will raise prices to compensate for the dollar's depreciation. Hence, prices could rise on BMWs, Italian suits, French wines and cheeses, and many other items.
So the weak dollar has an upside and a downside. On a more theoretical level, in the quarters and years ahead, the U.S. will have to decide whether it wants a strong dollar (which requires higher personal savings and fiscal restraint) or a weak dollar (which emphasizes economic expansion and a willingness to finance larger budget deficits). We'll examine the U.S.'s likely dollar policy in a future blog.
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