Show #441 Airing Sunday, 7/20/08
You’ve seen the headlines. The Euro and the Yen are going up, and the US dollar is falling. But what do those ups and downs really mean for you? Here to satisfy our yen for knowledge is our financial quarterback, Jim Lineweaver.
Question: “The Yen and Euro have risen to record levels against the dollar.” But what does all this mean to our viewers?
Answer: To answer this question, we first have to look at what “strong” and “weak” mean. These terms are relative terms, both in relation to another currency and to the past. So, when we hear that the dollar is weak, that means it takes more dollars to purchase a unit of another currency than it did in the past.
Just the opposite it true of a strong dollar: It will take less dollars to buy a unit of a foreign currency than it did in the past. Five years ago, a dollar would buy $1.33 in Canadian dollars. Today, $1US buys $1.03 Canadian.
Question: Let's start with travel. With a weak dollar, is this a good or bad time to go abroad?
Answer: This is a bad time to go, because it is going to take more of your dollars to finance your trip. For example, using current prices, and current exchange rates, taking a family of four to McDonalds in Paris and buying 4 Big Mac combo meals will cost over $39! (I hope if you go to Paris, you’re not really buying Big Macs!) Here in Cleveland, the cost is $20.20. The Economist magazine has for years kept a Big Mac index just so people can get a real feel for what all of this currency talk is all about. And everything you see in foreign countries from transportation, accommodations, dining, and on will cost you more today.
How much more? Over the past five years, the dollar has depreciated 30% compared to the Euro, the common currency for most of Europe. Using today’s exchange rates, the Euro has surpassed the US dollar to have the greatest circulation in the world, and the European Union has surpassed the US economy as being the largest economy in the world.
Question: If we're not going to Europe, does a weak dollar hurt us?
Answer: Yes. A weak dollar means we pay more for many things we buy. We “travel abroad” each and everyday with our dollars when we buy foreign goods. So we’re paying more when the dollar is weak, as it is today, and that means higher inflation.
A weak dollar also makes it more expensive for Americans to invest in foreign businesses.
Question: Are there any benefits to us when the dollar is weak?
Answer: Yes, a few. First, a weak dollar helps American companies that are trying to sell goods and services overseas, because our products become cheaper to foreigners.
It makes the US more attractive for tourists from foreign countries.
And it has helped our real estate markets. The real estate markets in popular American destinations like New York City, resort areas of Florida, and San Francisco, are seeing an influx of foreigners purchasing real estate. Their currency buys more dollars than it did in the past, and real estate in most areas in the US has dropped in value, so our real estate is on sale. They are getting a double advantage.
For example, if a property sold for $200,000 two years ago, and its current price has depreciated to $160,000, using the Euro to purchase the property would be like getting an additional 30% discount on the property, bringing it’s purchase price to around $112,000.
Question: Overall, are most Americans better or worse off when the dollar is weak, as it is today?
Answer: Most are worse off. When the dollar is strong, consumers are in a better position. Since we import so many goods today, a strong dollar makes those foreign goods more affordable. It is better for our consumers thinking about traveling overseas. A US investor sees his dollar go further when considering foreign investments. And this does not only apply to the very wealthy or institutional investors. If you own a mutual fund that holds foreign investments, now it applies to you.
Is there anything you can do to buffer yourself from the ups and downs of the US dollar? Give Jim a call for more information.
