Ralph and Debbie Gardner and their two children are planning on a trip to Copenhagen. But Mr. Gardner is worried the trip to Denmark will be so expensive that his family will have to stay in a youth hostel. The reason: After years as the top currency in the world, the US dollar is now on the way down. "It's definitely going to be a bit of a shock," says Gardner.
How big the shock turns out for the US depends on how quickly the dollar falls. Since February, the dollar has lost about 5 percent of its value compared with the euro, the yen, and the pound. This has dropped it to a two-year low.
If the buck falls faster, it could have an impact beyond the price of a hotel room in Copenhagen. Eventually, this could affect the US inflation rate. For foreign investors, a falling dollar also reduces the value of their stock holdings at a time when the US markets are falling. This could make it more expensive to finance the federal budget if foreigners decide to move their money elsewhere. That could ultimately make it more expensive to buy a house or car, since Treasury bills are the base against which most interest rates are set.
"We seem to be on the cusp of an inflection point," says David Wyss, chief economist at Standard & Poor's in New York. "But the question is how fast the correction and how far does it go."
There are already signs that some of the world's central bankers are getting queasy about the weakening dollar. Last week, for example, the Bank of Japan and the European Central Bank intervened in the currency markets to try to stabilize prices. Both are concerned about competitiveness.
The Japanese especially don't want a strong yen. "Japan is struggling, and their only significant strength is exports, so a stronger yen would be hard on their economy," says Mark Zandi of the website Economy.com. He says the Bush administration, however, seems ambivalent about the dollar compared with the last administration, which championed a strong currency.
Bush officials "seem to be trying to politically appease some sectors such as manufacturing, which have been hit by a strong dollar," says Mr. Zandi. "If they can get some relief from a weaker dollar, they may not have to pursue those protectionist policies."
In fact, the National Association of Manufacturers, which has advocated a weaker dollar for some time, late last month polled its executive board about when the shrinking dollar would help. Eighty percent expected export prospects to improve in the fourth quarter, reports David Heuther, chief economist. The biggest gainers, he says, will be semiconductors and airplanes, as well as business equipment and computers.
While exports might provide jobs, the cheaper dollar also means that imports are more expensive. Economists say this is the price to be paid of starting to put the US trade account in balance. "The price of trade-account adjustment is more inflation," says Bob Brusca, an economist at Ecobest Consulting.
But Lyle Gramley, a former Federal Reserve governor, says the US central bank is not worried. "Right now, inflation is so low the Fed doesn't want it to go any lower. This may be a blessing."
Maybe it will help the Fed, but Steve Jenkins, a cheese buyer at Fairway Market in Manhattan, says the higher-priced euro is really hurting him. He deals with about 60 small cheese producers in Europe.
"Just in the last couple of weeks, the euro has gone from 88 cents to 99 cents, which means the price of every bit of merchandise has to change," says Mr. Jenkins.
He estimates that his artisanal cheeses from France have gone up 10 percent. Because his profit margins are so thin, he can't afford to absorb the price increase. But he says he is not going to replace the French cheeses with something boring. "It just means the consumer will suffer," he says. "We've been spoiled rotten by the strong dollar."
That's certainly going to be the case for visitors to Europe. They will find prices about 8 to 10 percent higher than February, when the dollar peaked. For example, a top show costs £37.50. In February, this would have cost $52.90, compared with $57.25 today.
The Gardner family is bracing itself for higher prices when they travel this August to Copenhagen, as well as to Venice, Italy. Normally, Mr. Gardner can gauge the value of the dollar at the Fratelli Rossetti shoe store in Venice. In the past, buying the luxury shoes there meant saving between 30 to 50 percent of what he would have paid in New York.
But last year, the store priced the shoes in dollars. "They were already expensive, but even more," he says. "I can't imagine what they've done this year."