Why a declining dollar may seem to sting consumers less

The fact has been repeated by the business media for weeks: The value of the US dollar has shrunk over the past two years.

Economists have closely scrutinized the currency's devaluation, and the Bush administration has carefully crafted language to explain its slide to Wall Street and foreign bankers.

But what does a weakened dollar mean for US consumers?

The answer almost always has been: "It's bad news."

It's simple economics. When the value of the dollar falls as measured against other major currencies, US firms along the wholesale/retail chain must shell out more dollars to pay for the same imported products. For example, if the dollar loses 20 percent of its value compared with the euro, 10 wheels of French cheese that before cost a store $10 might now cost $12.

Such price increases have traditionally discouraged retailers from importing foreign products, thereby limiting choice - or have prompted them to raise prices. Neither option is good for consumers.

But a close look at the way several industries have coped with the dollar's slide shows that the immediate upshot for consumers isn't so black and white.

Products sold in the US are now made in so many countries that determining what is made in America, Asia, or Europe is difficult. Globalization tends "to blur everything ... making it harder to distinguish the overall effect of a weakened dollar," says Jeffrey Frankel, professor of international economics at Harvard University.

In the US, the purchasing power of the dollar falls thanks to inflation, about 2 percent a year now. In relation to other currencies, however, the dollar (or any other currency) falls when there is a lack of demand for it on foreign-currency exchanges.

Low demand for dollars is rooted in low interest rates, which give foreign investors little incentive to buy. Instead, many are investing in the euro, which since May 2001 has moved from being valued at 80 percent of the dollar to being worth 20 percent more.

That means products made in Europe could now cost American retailers about 40 percent more to acquire. Those costs are often passed on to consumers.

Consider the ledger of Woodland Farm Antiques in Hurley, Wis. Sales there have dropped 30 percent over the past six months, says owner Phil Kitzman, who has run the store for 18 years.

The reason: The cost of acquiring the antiques, primarily 19th- and 20th-century Dutch and Belgian furniture, has risen between 20 and 30 percent.

And that's not because of a spike in demand, but because the dollar has cooled. A piece that cost $500 a year ago would now cost $750, says Mr. Kitzman.

"With the dollar losing so much value, my [acquisition] prices have gone astronomically high," he says.

The same burdens are being felt at Ernie's Continental Delicatessen and Imports in Los Angeles, where customers are incredulous that Black Forest ham from Germany now costs 20 percent more than it did a few months ago, says owner Bob Hess. "When all of a sudden I have to charge them $24 instead of $20, they think I'm trying to get rich or something," he says.

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