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.
But price hikes are not limited to European luxury items. Major shifts in where US businesses make products are leading American companies to charge more.
The Ford Motor Company, for one, manufactures many vehicles in the Canadian province of Ontario. A year ago, Canada's relatively weak currency, valued at about 65 percent of the US dollar, helped Ford hold down costs.
But since then, the Canadian dollar has gained about 20 percent on its US counterpart. The result: Ford now pays an additional $1,500 to make a Windstar minivan at its Oakville, Ontario, plant, according to Brian Osler, president of the North American Automobile Trade Association in Richmond Hill, Ontario.
That added cost will be reflected in sticker prices at US dealerships before the end of the year.
"Cars that have been produced in Canada are likely going to get more expensive for American consumers," says Mr. Osler, who says manufacturers are unlikely to change their prices until next year's models are rolled out in the fall.
The foreign outsourcing isn't limited to Ford. Over the past decade, the Swedish company Volvo has begun manufacturing in Canada, German carmaker Volkswagen builds many of its Beetles in Brazil, and GM makes some of its Chevrolet trucks in Mexico, according to Osler.
With European companies making products in Latin America, and American companies manufacturing in Canada, the effect of the weak dollar on specific products is difficult to gauge.
But the trend could prove positive for US consumers overall. East Asia accounts for a much larger share of US imports than does Europe, due in large part to lower labor costs. Currency also plays a role: Because most of these countries, notably China, tie their currency closely to the dollar, US retailers are able to import their wares at little extra cost.
"More of our imports are from China and less from Europe, so the depreciation of the dollar has had less of an effect this time," says Professor Frankel.
That is true of the cellphone industry, where Scandinavian companies like Nokia and Ericsson, and even the US company Motorola, now manufacture most of their handsets in East Asia, says Rudy Baca, an analyst with the Precursor Group, a market-research firm in Washington, D.C.
Even industries that incur major costs due to the dollar's fall may not pass them on to consumers.
In the furniture industry, for example, competition is so fierce that experts believe retailers will eat their losses.
"Competition is just too tight to raise prices," says Stefan Wille, president of Aktrin, a furniture-industry research firm in High Point, N.C.
Also, many retailers probably will not restrict their variety of imports. At a vulnerable time for most businesses, maintaining a reputation for quality and choice is a top priority.
"If you're selling Gucci shoes, you're not going to sell 'brand X' from China as a substitute right now," says David Wyss, Standard and Poor's chief economist.